Developments in UK insolvency by Michelle Butler

Category Archives: Case law

In my last blog, I set out a few questions that had been raised in the spring/summer R3 SPG Technical Reviews. Now that I’ve returned from my intriguing holiday in Russia, I’ll answer them.

I haven’t commented on the draft SIP9, as I shall be working on my consultation response. I also need to focus primarily on the Rules, as I’m presenting a webinar for the ICAEW on 9 September and at the R3 Regional event on 22 September. Maybe by then, we’ll have a final SIP9 that we can all work to (and then I can record a webinar for the Compliance Alliance 🙂 ). Is that too much to ask..?

When can/should a CVL Liquidator seek approval for his fees: (i) prior to being appointed by the shareholders; (ii) after the general meeting but before the S98 meeting (via a Centrebind); or (iii) after the S98 meeting?

This question has been covered at length by myself (http://goo.gl/9mrWl4), Gareth Limb (http://goo.gl/9LvB2U) and I’m sure many others, but as it was the most frequently-asked question – and probably affects a significant majority of IPs – I thought it was worth covering again.

The answer seems to be any of the above, but each comes with its own difficulties:

(i) The difficulty here is that the Rules require the “liquidator” to circulate his fees estimate. I’ve heard more than one person within the Insolvency Service express the view that this is intended to encompass a fees estimate from the IP prior to his appointment as liquidator, but there has been nothing written down. I understand that a Dear IP is on its way, although there will still be an element of risk in following a Dear IP over the letter of the Rules (remember Minmar..?)

There was a rumour that the revised SIP9 would try to clarify the matter, but if the words, “an insolvency practitioner is not precluded from providing information within pre-appointment communications (such as when assisting directors in commencing an insolvency process)” (para 7, draft revised SIP9), are meant to take care of it, then I think they fall far short – and, as Gareth pointed out, a SIP cannot address a deficiency in legislation either.

(ii) At the R3 Reviews, several expressed the view that a Centrebind can only be used when there are company assets at risk that require a liquidator to deal with them immediately. I have to say that I am not aware of any such restriction and I have not heard – at least via the IPA within the past 10 years – of any pressure to discourage IPs from engaging in Centrebinds. The fact that directors can appoint their choice of Administrator in short order, I think reduces the perception that it is somehow shady to get a non-creditors’ IP in office. Rather, I suspect that many IPs naturally avoid Centrebinds because they do not want to be appointed with only limited powers to deal with the company’s assets.

At first glance, Centrebind appears to have some value in the context of the Fees Rules, as it gives the liquidator a week or so to circulate his fees estimate before the S98 meeting but after his appointment by the members. However, what would the sequence of events be? Either the S98 notice would not be issued until after the members’ meeting (which would contravene SIP8 para 13) so that it can accompany the liquidator’s fees estimate, or the fees estimate would be sent separately, a few days’ after the S98 notice is sent. This latter sequence does not appear to be prohibited, but I would be surprised if it were the most attractive option from the regulators’ perspective, as I understand that the preference is that the fees estimate is sent along with the S98 notice and proxy form, not days later.

(iii) There is an additional cost in convening a R4.54 general meeting of creditors after the S98 meeting so that the liquidator may issue his fees estimate. However, given the issues around the two alternatives, I cannot see why the regulators would protest. From the IP’s perspective, however, the effect of the liquidator being the chairman at a R4.54 meeting, rather than the director at the S98 meeting, is bound to increase the risk that there is no positive vote from creditors on the fees resolution. And of course, who wants to provide a fees estimate before they’re appointed? I appreciate that this was one of the ideas behind the Rules (job-tendering even being suggested), but in that case the Insolvency Service should have drafted the Rules correctly, shouldn’t they?!

To make life easier, you could switch from time costs to a fixed or percentage fee basis. However, if the response at the R3 Reviews is anything to go by, it does seem that IPs may be reluctant to start seeking resolutions on a fixed/percentage fee basis. In any event, this doesn’t solve the problem. Whilst it means that you won’t need to provide a “fees estimate”, you do still need to provide information on the work you propose to undertake and an expenses estimate. The draft SIP9 also adds to the list of information required to propose fixed/percentage fees, making it not quite the easy fix it originally appeared.

Would it be sufficient to provide a fees estimate to attendees of the S98 meeting? How else can an IP who takes the appointment from the floor of the S98 meeting deal with a fees resolution?

These have been pretty-much answered above, but I think the fact that they were asked demonstrates how we’re exploring the Fees Rules and realising that S98s will never be the same again. Dare I mention that the 2016 Rules only make matters a thousand times worse for S98s? For example, in future the Director’s Estimated Statement of Affairs will need to be circulated to all creditors with notice of the S98 “meeting”, which will mean wholesale changes to our S98 process.

Returning to 1 October, it will not be sufficient to circulate a fees estimate only to S98 meeting attendees, as the Rules state that “the liquidator must, prior to determination of which of the bases [of fees] are to be fixed, give [the estimate(s)] to each creditor of the company of whose claim and address the liquidator is aware…” Although the Rules do not state how long before “determination” of the fees basis the fees estimate needs to be circulated, I think this means it will be very difficult for an incoming IP to obtain a fees resolution at the S98 meeting. I suspect that this can only really be tackled by a subsequent R4.54 meeting.

What level of breakdown is needed to comply with the new rules’ requirement to provide the (time cost) fees estimate broken down by “each part of the work”? For example, is “asset realisation” sufficient, or does it need to be broken down into book debt collection, sale of business/assets, etc.?

The answer to this is not in the Rules and I understand that the Insolvency Service did not envisage a greater breakdown than the old SIP9 six categories (administration & planning, asset realisation, investigations, trading, creditors and other case-specific matters).

Neither do the Rules provide for a proportionate approach, such that a larger case may be expected to have a greater degree of breakdown than a small one. The Rules treat all cases the same and simply require fees estimates to specify, inter alia, “details of the work the insolvency practitioner and his staff propose to undertake [and] the time the insolvency practitioner anticipates each part of that work will take”.

The draft revised SIP9 avoids being prescriptive, but is worded in such a way that I think it will be an easy step for the RPB monitors to assert SIP9 breaches if its “spirit” is not observed. The draft SIP states:

“Each part of an office holder’s activities will require different levels of expertise, and therefore related cost. It will generally assist the understanding of creditors and other interested parties to divide the office holder’s explanations into areas such as:

Statutory compliance

Asset realisation

Distribution

Investigations

“These are examples of common activities and not an exhaustive list. Alternative or further sub-divisions may be appropriate, depending on the nature and complexity of the case and the bases of remuneration sought and/or approved. It is unlikely that the same divisions will be appropriate in all cases and an office holder should consider what divisions are likely to be appropriate and proportionate in the circumstances of each case. An office holder should endeavour to use consistent divisions throughout the duration of the case. The use of additional categories or further division may become necessary where a task was not foreseen at the commencement of the appointment.”

Thus, it seems that, generally, “asset realisation” is one “part of the work” and will not usually need to be broken down into sub-divisions.

Given that the new rules require the (time cost) fees estimate to be broken down by “each part of the work”, does the IP need to revert to creditors if the time costs are exceeded for one part of the work, but the total estimate is not exceeded?

There seem to be some differences of opinion on this question. Personally, I believe that the Rules are very clear. They state that “the [office-holder’s] remuneration must not exceed the total amount set out in the fees estimate without approval”. The Rules require no comparison of the fees estimate breakdown in reports and it seems that, once the fees estimate has been approved, the breakdown has no further relevance (although, when seeking approval for exceeding the estimate, a comparison may come in handy in order to explain the reasons for the excess and what additional work has proven necessary).

The draft SIP9 states that creditors/other interested parties will commonly be concerned with “the actual costs of the work, including any expenses incurred in connection with it, as against any estimate provided” and that the IP should report “in a way which facilitates clarity of understanding of these key issues”. I guess you can still take these words either way: does it require only a comparison of the total costs incurred against the fees estimate as a single figure? Or should a comparison be made of “each part” of the fees estimate against the actual costs incurred in each of those categories? Keeping in mind what creditors want to know (if anything!), I would argue that, if it appears that the original fees estimate will not be exceeded, then creditors are unlikely to be interested in seeing a comparison of each category.

However, the speaker’s answer at an R3 Review worried me. Although he may have been answering the question on the hoof, he indicated that there was an expectation that creditors would be asked to approve an increased fees estimate even where only one of the work categories was going to be exceeded, but where the original fees estimate in total was not under threat of being exceeded. I really cannot see that this is required by the Rules – and it is not hinted at in the draft SIP9 – and I struggle to see how an IP might be justified in incurring additional costs in seeking creditors’ approval where it is clearly not required under statute.

Can a (time cost) fees estimate provide a range of likely costs or does it need to be a single figure? If the latter, how should IPs estimate, for example, the costs of realising the interest in a bankrupt’s property at an early stage of the case?

The Fees Rules do not allow a range approach. The fees estimate acts as a simple cap. The draft SIP9 reinforces this message: fees estimates “may not be presented on the basis of alternative scenarios and/or provide a range of estimated charges”.

I think that Dear IP 65 attempted to answer the second question by referring to “milestone” fees estimates. This idea was reinforced at the R3 Reviews. When dealing with something like realising interest in a home, where a straightforward deal might be achieved quickly or the matter could run and run, it seems that the expectation is that the Trustee would estimate the costs for establishing a strategy and then revert to creditors if it became clear that a court application would be necessary.

I do wonder how practical this is, especially when the Rules require the expenses estimate at the initial approval stage to be the total expenses anticipated for the case. Thus, the Trustee needs to estimate his third party costs right at the start; the Rules do not provide a similar “milestone” approach for expenses estimates.

True, the Rules also do not require an expenses estimate to be approved, either up front or if it looks like it will be exceeded, but it does not help answer the question of how to present a Day One expenses estimate: should the Trustee include the likely costs of applications for possession and sales orders, especially if his fees estimate only reflects “milestone” costs not including the time costs of dealing with a court application scenario? But if he omits the likely legal costs, how transparent is the estimate and is it even compliant with the Rules?

What consequences does the expenses estimate have for the future administration of the case?

Finally, a bit of good news: the office holder is not constrained by the expenses estimate. If he needs to incur additional expenses, he can do so without creditor approval. The draft SIP9 seems to treat Category 2 disbursements in this way too.

Progress reports will need to include reference to whether the original expenses (and fees) estimate remains sound. If the expenses incurred/anticipated are likely to exceed (or have exceeded) the original expenses estimate, the reasons for that excess need to be included in the next – and seemingly all subsequent – progress reports (which could get a bit repetitive!). There is no requirement, however, to provide a revised estimate.

Can an IP stop working on a case if creditors vote against an exceeding of the fees estimate?

The R3 Review speaker’s answer was: no. The IP would need to continue with his work and, if he wanted any more fees, then he would need to use the statutory remedies such as applying to court.

When the Insolvency Service’s fees consultation was ongoing a year or so ago, I remember having a conversation with some Insolvency Service staff on this question. Their view was that IPs should not be expected to continue to work if they were not comfortable they would be paid for it.

Personally, I think both views have merit… depending on the circumstances. Clearly, an office holder has work to do in concluding a case and the Rules do not provide failure to be paid as a reason for resignation. However, I do struggle to see how an IP can be forced to take “non-statutory” steps if the creditors have not supported a request by the office holder to be paid for the work.

The Insolvency Service’s “milestone” view of the Rules seems to support the idea that an office holder can down tools. The original fees estimate needs to detail “the work the insolvency practitioner and his staff propose to undertake”, so in a milestone case the IP might propose, say, to chase the easy book debts as stage one. When things get a bit tough and the IP needs to consider taking stronger measures to squeeze out a few more pounds, perhaps this is when he proposes stage two along with a request for approval of “excess” fees. If the creditors reject this proposal, might the IP be justified in moving to close the case? Or is he required by statute to collect in the company’s assets regardless?

Wouldn’t it be correct to give creditors a choice: either I bring this to an end now and distribute what balance I have or I spend some/all of that money in pursuing an uncertain/difficult asset? Doesn’t SIP2 lead us in that direction already?

Of course, it would be a harder sell if the IP were to say: erm, the RoT claims have proven to be bigger and tougher than I’d originally contemplated, so I’m going to have to spend more of the pot resolving them, is that ok?

With these kinds of questions looming, is it any wonder that the expectation is that fees estimates will tend to be drafted on a worst-case scenario basis? Personally, I don’t see that anything else is practical.

Did you wonder what the RPS was going on about when it announced (Article 54, Dear IP 64) that the recent EAT judgment would not affect its claims-processing, but it has sought advice? Bearing in mind that the RPS gets involved some way down the insolvency process, is there anything that IPs should be taking into account right now?

The Judgment: Bear Scotland Limited & Ors v Fulton & Ors

I briefly described the decision of the Employment Appeal Tribunal in an earlier blog post: http://wp.me/p2FU2Z-8I. In a nutshell, the EAT decided that the “normal remuneration”, to be used in calculating the employees’ claims for holiday pay, should include overtime that the employer was not bound to offer but that the employees were required to work (or could not unreasonably refuse to work), if requested (“non-guaranteed overtime”).

Permission to appeal was granted and it seemed widely-thought that an appeal was likely in relation to part of the EAT’s judgment, which limited claims for underpaid holiday pay to instances of underpayment not exceeded by a gap of more than three months. However, the Unite union announced that it will not appeal (http://goo.gl/EqII77) and, as the Tribunal judge expressed the view that this issue alone was the arguable one, personally I’m not sure why the employers would pursue a further appeal. Therefore, it seems unlikely that there will be an appeal (but I’m no lawyer).

The Government Task Force

I also mentioned in my earlier post that the government had set up a task force to assess the possible impact of the decision.

On 18 December 2014, the government announced its solution: http://goo.gl/kJ7sJu. Unusually with no public consultation, it swiftly laid down regulations – the Deduction from Wages (Limitation) Regulations 2014 – to limit unlawful deductions claims to two years. The regulations will come into force on 8 January 2015, although they will only take effect on claims made on or after 1 July 2015, so there is a 6-month window for claims to be lodged potentially going back to 1998 when the Working Time Directive was implemented in the UK.

It is undeniable that the Bear Scotland case precipitated these measures, although the Impact Assessment (“IA”) makes clear that the regulations will limit claims not only arising from this decision. The IA mentions, for example, the ruling from the CJEU in the case of Lock v British Gas (see, e.g. my blog post: http://wp.me/p2FU2Z-82). This case concluded that sales commission should be reflected in holiday pay calculations, although the UK application of this decision will not be known until the case is heard by the Leicester Tribunal, which I understand will not happen until February (http://goo.gl/ezx8Qj).

Although the regulations don’t actually affect the Bear Scotland decision, just the extent of businesses’ (and the RPS’) exposure to claims arising from the decision, the rhetoric doesn’t suggest that the government feels there is much risk that the decision might be overturned. Then again, the regulations do simply plug a dangerous gap in the ERA96, so they are valuable whether or not Bear Scotland happened; the future is never left wanting for unexpected court decisions.

Dear IP 64

Given this background, I am somewhat surprised that the RPS has announced that it “will continue to process claims in the usual way until the expiry of the appeal period” of the EAT decision. However, because I assume that the appeal period is largely a valuable pause in which the RPS can take advice and consider its next steps, what puzzles me a little more is: what action might the RPS take if there is no appeal?

The IA makes clear that “it is the worker’s responsibility to prove that they have a holiday pay claim in the employment tribunal”. Thus, I would have thought that there is no obligation on the RPS – or by extension on insolvency office holders – to examine Company records to see whether past holiday pay claims have been calculated in line with the decision and, if not, look to adjust them. However, I would also have thought that if any employees present a claim for unlawful deductions, whether to the RPS or to an IP, this could be dealt with without the need for the tribunal process, albeit quite rightly I think after the expiry of the appeal period.

But what about holiday pay claims that have not yet been processed? Again, understandably the RPS will not want to pay out any enhanced holiday pay until the appeal period has expired. Also, I assume, it will be for employees to make clear on their RP1s the “normal remuneration” that they expect to form the basis of their holiday pay calculation, although I don’t think that the RP1 form lends itself well to dealing with disclosure of non-guaranteed overtime – maybe another re-write is something that might appear after the appeal period has expired.

Thoughts for IPs

Finally, what about forms RP14A, which IPs complete to provide the RPS with basic information about employees made redundant from insolvent businesses? The forms (I think) only ask for “basic pay”, so what should IPs be answering here? I’m sure that IPs will not be criticised for acting on the Dear IP basis and continuing to complete RP14As “in the usual way until the expiry of the appeal period”, although personally this seems a little short-sighted to me. If an IP were to know that employees’ holiday pay claims would be different if the Bear Scotland decision were applied, should he/she not take this into account when submitting an RP14A, at the very least alerting the RPS to the possible impact of the decision on the employees’ claims against the insolvent business in question?

Other questions arise by extension: should the IP make enquiries of insolvent business’ payroll departments to explore whether the effect of the decision has already been taken into account, or if it has not been considered, what effect it would have?

Of more concern to IPs dealing with a trading-on situation would be: how is the payroll department calculating holiday pay going forward? IPs will not be want to be taken unawares by receiving claims for unlawful deductions long after the estate funds have been disbursed.

I also envisage this decision impacting on the TUPE obligation to provide to purchasers employee liability information, which would include any claims that the employer has reasonable grounds to believe that an employee may bring.

Of course, all this will already have been considered by ERA specialists and departments and IPs will not be short of solicitors who will be happy to advise. Eventually also, we may receive an update from the RPS.

I think it’s great that summaries of court decisions are more freely-available now than ever before. I’ve wondered whether I should just drift back into the shadows and leave it to the pros… but then I remember that, even if no one reads them, authoring my own summaries helps get them fixed in my own mind. Therefore, I shall continue:

Sands v Layne – should the court consider all creditors’ interests when considering whether to dismiss a petition because the debtor has reached an agreement with the petitioner alone?

Re Business Environment Fleet Street – as statute allows an administrator to take control of property to which he thinks the company is entitled, can he sell it?

Parkwell Investments v HMRC – should provisional liquidators be appointed if there is a tax assessment appeal outstanding?

Bear Scotland v Fulton – should non-guaranteed overtime be included in holiday pay?

Connaught Income Fund v Capita Financial Managers – does a liquidator have a statutory power to get in post-appointment assets?

Day v Tiuta International – if the charge under which receivers are appointed is invalid, can they remain in office by reason of the appointor’s subrogated rights under another charge?

Mr Layne originally sought to avoid bankruptcy by offering security over his home and payment by instalments to the petitioning creditor. However, given the time that the debtor would have needed to pay off the debt, the judge rejected his defence that the creditor had unreasonably refused the offer and made a bankruptcy order in July 2011. In June 2012, the parties came to an agreement as regards payment and security and, by means of a consent order, the bankruptcy order was set aside. In June 2013, the Trustee in Bankruptcy applied for the consent order to be rescinded pursuant to S375 of the IA86, the thrust of his submission being that the debtor and creditor had sought to deal with the matter between themselves without taking into account any obligations to him or to other unsecured creditors.

The deputy judge expressed a wavering view over the conclusion leading from the decision in Appleyard v Wewelwala that S375 reviews and rescissions by first instance courts can deal with only decisions made by those courts, not also decisions emanating from appellate courts, and thus the Trustee’s application failed. However, given the deputy judge’s “diffidence”, he considered further questions arising from the application.

How should the interests of other unsecured creditors impact on the court’s consideration of whether a petition should be dismissed under S271(3)(a), i.e. where “the debtor has made an offer to secure or compound for” the petition debt? The deputy judge concluded that, as the first ground for dismissal under S271 involves the court being satisfied that the debtor is able to pay all his debts, “the second ground – involving an offer to secure or compound – must therefore be intended to apply even where the debtor is not so able” (paragraph 20).

The deputy judge listed the other unsecured creditors’ potential remedies, including seeking to be substituted as petitioner and challenging the security as a preference (albeit that they would need to establish a desire to prefer the original petitioner). “In short, in so far as other unsecured creditors may be affected by the provision of the security to the petitioner, the statute provides a targeted remedy in what it considers suitable cases, and it is neither necessary nor appropriate for their interests to be addressed in the context of the bilateral dispute between the petitioning creditor and the debtor and in particular the issue whether, where security is offered and rejected, a bankruptcy order should be made or refused” (paragraph 22).

The deputy judge also observed that the Trustee’s argument “suffered from a serious dose of circularity” (paragraph 24) in that the Trustee could not have been joined as a respondent to the original appeal, which “was to decide whether the bankruptcy order should stand. If the order fell and there was no bankruptcy, all consequences dependent on it – the trusteeship and the vesting – disappeared with it” and thus he had no standing to bring the application in the first place.

Moon Beever published an article examining the role of the Trustee as illustrated by this decision: http://goo.gl/Fu62LU.

Administrators applied under Para 72 of Schedule B1 for leave to dispose of assets, including properties subject to subleases and equipment located at the properties, which one of the respondents claimed to own. Under Para 72, the court can authorise administrators to dispose of “goods which are in the possession of the company under a hire-purchase agreement”, which under Para 111 extends to chattel leasing agreements.

The deputy judge examined the agreement between the Company and the respondent and concluded that the Company had not been granted possession of the assets, which remained either with the respondent or had transferred to the subtenants. Thus, the agreement did not comprise a chattel leasing agreement, as it did not involve the bailment of goods.

The Administrators pursued an alternative ground, arguing that Paras 67 and 68 combined entitled them to manage – which would include disposal of – property to which they think the Company is entitled. The deputy judge rejected the argument that “property” in the two paragraphs has the same meaning: it may be appropriate for an administrator to take control of assets in a hurry on his appointment, but disposal would be a step too far. “It would confer an exorbitant jurisdiction on the administrator to convert property belonging to third parties, simply because this happened to be desirable on the balance of convenience” (paragraph 19.3). The deputy judge also saw no support in S234, which relieves an administrator from liability for converting third party assets where he acted reasonably.

But what if the sale sought by the Administrators appeared to make sense commercially? The Administrators’ case here was that there was considerable “marriage” value in disposing of the assets together with the properties, enhancing the purchase price by some £7m. In this particular case, the deputy judge saw the marriage value in the proposed sale, but did not see that a delay in a sale would be detrimental and thus was not satisfied that the balance of convenience lay in ordering an immediate sale (even if he had been satisfied that the court had jurisdiction to order it).

For an alternative – and far more authoritative – analysis, you might like to read the article by Stephen Atherton QC (via Lexis Nexis) at http://goo.gl/VYFblM.

Attempts to “see-saw” between courts does not avoid the appointment of provisional liquidators

This case has received some attention due to the judge’s statement that he was unable to accept the reasoning of the deputy judge in Enta Technologies Limited v HMRC (http://wp.me/p2FU2Z-6W), which if it were correct would lead to a “very undesirable consequence… namely the inability of the court to appoint anyone a provisional liquidator to a company where the company has an outstanding appeal against the assessment” (paragraph 21).

In this case, the Company had applied for the termination of the provisional liquidation and the dismissal of HMRC’s winding-up petition on the basis that the First Tax Tribunal was the place to determine its VAT position and that, as there were appeals against assessments still outstanding, it was inappropriate that the Companies Court should pre-empt the process by appointing a provisional liquidator. Sir William Blackburne stated: “There is to my mind something highly artificial in the notion that this court has jurisdiction to entertain a winding-up petition brought by HMRC against a company founded on the non-payment of a VAT assessment… for so long as the company has taken no steps to appeal the assessment to the FTT… only to find that that jurisdiction is lost the moment the company files its notice of appeal to the tribunal or, if not lost, is no longer exercisable, irrespective of the merits of the appeal… I cannot think that this approach is right. Jurisdiction in this court cannot arise and disappear (or be exercisable and then suddenly cease to be) in this see-saw fashion” (paragraphs 19 and 20).

The judge believed that the true question was whether the appeal to the FTT has any merit. If it has none, then the assessment continues to constitute a basis for a winding-up petition. However, “if the court, on a review of the evidence before it, considers that the company has a good arguable appeal which will lead either to the cancellation of the assessment or to its reduction to below the winding-up debt threshold, it will dismiss the petition” (paragraph 20). In this case, the judge concluded that the Company had failed to produce sufficient evidence to demonstrate a good arguable case and thus the provisional liquidator was allowed to continue in office.

For a more practical look at the implications of this decision, you might like to look at an article by Mike Pavitt, Paris Smith LLP, at http://goo.gl/0lZyrO.

None of these cases involved insolvencies, but I can see how their impact on holiday pay calculations could have consequences for IPs. However, permission to appeal has been granted and the government has set up a taskforce to assess the possible impact of this decision (see http://goo.gl/8jmV53).

The conclusions of the Companies’ appeals against several elements of previous tribunal decisions were as follows:

Normal remuneration – in relation to which holiday pay is calculated –included overtime that employees were required to work, even though the employer was not obliged to offer it as a minimum.

An employer’s failure to pay holiday pay on this basis could be claimed as unlawful deductions from pay under the ERA1996, but not where a period of more than three months had elapsed between each such unlawful deduction (i.e., I think, if, say, holiday was paid short in March, August, and October of this year, only August and October could be claimed; March would not be able to be claimed, as it occurred more than three months before the August short payment).

Pay in lieu of notice is not required to be calculated under the same basis, i.e. it does not include the overtime described in (1) above. This differs from the position as regards holiday pay, because it was felt that the parties’ view of what hours were “normal” at the time the contract was entered into would not have been informed by the experience of working under that contract, which described overtime as not guaranteed and not forming part of normal working hours.

In two of the cases concerned, time spent travelling to work (which was paid during working times as a Radius Allowance and Travelling Time Payment) also fell within “normal remuneration” for the purpose of calculating holiday pay.

There has been some comment (e.g. Moon Beever’s article at http://goo.gl/Etay9A) that overtime other than compulsory overtime is also likely to be comprised in “normal remuneration”. Whilst this was not dealt with by the Appeal Tribunal, the judge did highlight the principle that “‘normal pay’ is that which is normally received” (paragraph 44) and thus I can see why that conclusion might be drawn.

The key points – and quotes – that I’d extracted from the judgment were the same as those highlighted by Pinsent Masons (http://goo.gl/QU8o9i).

The liquidators of the Fund (which was an unregulated collective investment scheme set up as a limited partnership) took an assignment of the investors’ claims, but these were resisted under a number of arguments including a challenge that the liquidators acted outside their statutory powers in taking the assignments.

The judge decided that the assignments were allowed under the liquidators’ Schedule 4 power “to do all such things as may be necessary for winding up the company’s affairs and distributing its assets”, including those that had not been assets of the partnership when it traded.

Receivers’ appointment sound notwithstanding that their appointor’s charge could be invalid

This is a complicated case, which I think has been successfully summarised by Taylor Wessing LLP (http://goo.gl/YhN2ga).

Tiuta International Limited (“TIL”) agreed to lend money to Day to enable him to repay a loan provided by Standard Chartered (“SC”) and to discharge the charge to SC. Later, due to Day’s non-payment, TIL appointed receivers under the powers of its new charge, but Day claimed damages against TIL that, if set off against the loan, would release TIL’s charge and invalidate the receivers’ appointment. TIL argued that, even if Day were successful in escaping from its charge, TIL was still entitled to appoint receivers because it was subrogated to the SC charge by reason of its payment settling SC’s loan and charge. Day contended that, even if this were so, TIL would need to appoint receivers again but this time in express reliance on the SC charge.

Lady Justice Gloster stated: “it is important to bear in mind that the correct analysis of the right of subrogation is that a party who discharges a creditor’s security interest and who is regarded as having acquired that interest by subrogation, does not actually acquire the creditor’s interest, but rather obtains a new and independent equitable security interest which prima facie replicates the creditor’s old interest. Subrogation does not effect an actual assignment of the discharged creditor’s rights to the subrogated creditor. What subrogation means in this context is that the subrogated creditor’s legal relations with a defendant, who would otherwise be unjustly enriched, are regulated as if the benefit of the charge had been assigned to him” (paragraph 43).

“Thus whilst TIL did not purport to rely on the SC Charge when appointing the Receivers… and purported to rely only on the TIL Charge to make the appointment, that in my judgment was immaterial… Subrogation is a means by which the court regulates the legal relationships between parties in order to avoid unjust enrichment and the precise manner in which it operates may vary according to the circumstances of the case. In the present case, on the hypothesis that the TIL Charge was voidable, the doctrine of subrogation, in conferring a new equitable proprietary right on TIL, would have operated to entitle TIL to the notional benefit of the SC Charge for the purposes of securing repayment of the TIL Loan made under the terms of the TIL Loan Facility” (paragraph 44). She continued that TIL was not required to follow the payment demand process as required by the SC charge, which would be “nonsensical” since SC’s liabilities had been discharged, but it was entitled to follow the process set down in the TIL loan facility and charge leading to the appointment of receivers.

The Administrators’ Proposals were approved with a modification that the Administration move to CVL within 6 months of the commencement of the Administration; the Liquidators were to be different IPs to the Administrators.

The 6-month time period ended on 31 May 2012. Immediately before this, the Administrators convened a creditors’ meeting to approve revised proposals providing that the Administration would move to CVL within 28 days of resolution of an issue regarding the quantum of a secured creditor’s claim. The revised proposals were rejected and on 18 June 2012 the Administrators applied for directions. Before this was heard, settlement was reached with the secured creditor and the Administration moved to CVL on 12 August 2012.

The Administrators’ fees had been approved on a time costs basis but the creditors’ committee refused to approve that the Administrators draw fees in relation to time costs incurred after 18 February 2012 (having approved fees incurred prior to this date). The committee asserted that it was never envisaged that the Administrators would carry out the vast amount of work for which remuneration was claimed; the committee felt that the Administrators should have worked simply to bring their appointment to an end and allow the Liquidators to fully investigate matters. Consequently, the Administrators applied for the court to fix their fees.

Mr Registrar Jones’ consideration addressed a number of areas:

Did the Administrators’ actions fall outside the approved Proposals?

The judge stated that “whilst the views of a creditors’ committee should be taken into account during an administration.., it is not for the committee to determine how the administration should be conducted. That is a decision for the office holder in performance of the duties and powers Parliament has thought fit to entrust to administrators. The outcome of such decision making… will depend upon the office holder’s assessment of how best to achieve the purpose of the administration in accordance with the powers conferred upon them by paragraph 59 of Schedule B1 and within Schedule 1 to the Act” (paragraph 26).

The judge then had to consider whether the work done by the Administrators was for the purposes of the Administration objective or otherwise formed part of the Administrators’ duties and responsibilities. He said: There will always be grey areas when deciding whether work will result in a better return and therefore should be carried out. It will not be a black and white scenario with a plain dividing line. The decision will depend upon all the circumstances and involve commercial judgment calls by the office holder in the exercise of his powers. The court will normally not question the commercial judgments of an administrator. Usually a misunderstanding of law or apparent unfairness or a breach of duty will be required before the court will review such judgments” (paragraphs 30.6 and 30.7). Consequently, the judge stated that it could not be concluded that the Administrators’ actions fell outside the Proposals. He felt that this applied even in relation to activities that were not expressly referred to in the Proposals, such as in this case debt recovery efforts, given that a delay in recovery actions usually results in lower realisations.

Were the Administrators entitled to be paid fees for the period after the 6-month timescale when the approved Proposals provided for the move to CVL?

The judge recognised the commercial decisions taken by the Administrators in seeking to resolve the issue regarding the secured creditor’s claim, acknowledging that any delay would have been disadvantageous given the high interest rate attached to the debt. Consequently, the judge considered that the decision could not be described as “perverse” and it was a decision that “fell within the parameters of their commercial decision making powers” (paragraph 36.4). However, the judge disagreed that the move to CVL could not have been done within the 6-month period; he felt that there were always more than enough funds to set aside to cover the maximum amount of the secured creditor’s claim plus interest.

Were the Administrators entitled to be paid fees after they had ceased to act, given that they worked to assist the Liquidators?

The Administrators sought approval for costs incurred in relation to a number of tasks including answering the Liquidators’ enquiries, assisting in the recovery of a director’s loan, other debts and overpayments, and dealing with the committee’s questions. The judge’s view was that R2.106 was limited only to remuneration of the Administrator whilst in office. Therefore, the judge declined to fix the remuneration after the termination of the Administrators’ appointment, stating: “that is a matter between the Administrators and the liquidators” (paragraph 43).

What about the quantum of fees sought?

Then the judge turned to the detail of the Administrators’ application. The judge referred to the Practice Direction (2012) and in particular paragraph 20.4 as providing guidance on the information required to support the fees application and the judgment suggests that in a number of places the Administrators’ evidence failed to satisfy the judge as regards “briefly describing what was involved, why it was necessary and why it took the time it did” (paragraph 47).

For example, the Administrators sought fees of £23,473 in relation to “PKF/BDO Review”. The Administrator’s witness statement referred to the need to investigate potential claims quickly and early and thus such work could lead to actions that would produce a better outcome for creditors. However, the judge observed: “This is wholly unspecific. There is no narrative describing and explaining the work, whether as to what it was or specifically as to why it was justified under the Objective” (paragraph 50.40). The judge did not award any remuneration in relation to this activity.

The result of the judge’s examination of each task for which remuneration was sought was that, from a starting point request to fix fees at £389,341, fees of only £233,147 were approved.

The Bank, having a second charge over the debtor’s properties, demanded payment from Mr Phillips as guarantor of a loan to his company. Notwithstanding that Mr Phillips’ IVA Proposal (which was approved) showed that the properties attracted negative equity after the first charge, the Bank commenced possession proceedings. Mr Phillips applied for the claims to be struck out or dismissed as an abuse of process. The Bank later served a notice of discontinuance and the principal questions for the court related to the treatment of the costs arising from the process.

The court was asked to consider whether the Bank was seeking possession of the properties for a collateral purpose beyond its powers as a chargee and whether the Bank’s claims to possession were an abuse of process. Despite the fact that it appeared the Bank would not gain any benefit from selling the properties (although there was some argument that the Bank might have been able to raise rental income from its possession), the judge felt that the pressure on the charger and his family resulting from the possession proceedings was neither a collateral purpose outwith the Bank’s powers nor an abuse of process. Ultimately, the proceedings were brought for the purpose of obtaining repayment of the sums secured by the charge.

However, although the charge entitled the Bank to recover its costs incurred “in taking, perfecting, enforcing or exercising (or attempting to perfect, enforce or exercise) any power under the charge” (paragraph 8), the judge decided that the Bank’s own costs, together with its liability to pay Mr Phillips’ costs arising from the discontinuance of the proceeding, were not reasonably incurred and therefore were not recoverable under the charge: “The Bank got absolutely nothing out of these proceedings, which have been a waste of time and expense from its point of view” (paragraph 75).

Finally, because the Bank had started the proceedings after Mr Phillips’ IVA had been approved, the Bank was unable to set off its liability to pay Mr Phillips’ costs against its claim in the IVA, per clause 7(4) of the IVA’s Standard Conditions (which appear to have been R3’s standard conditions).

The Administrator had applied for the ending of the Administration, together with the dismissal of the application of Creative Staging Limited to withdrawn its winding-up petition (which, under Paragraph 40(1)(b) of Schedule B1, had been suspended on the appointment of the Administrator by the QFCH), the dismissal of the application of another creditor to be substituted as petitioner, and finally for a winding-up order on the original petition.

Why was the Administrator so keen to have the suspended petition revived, rather than to petition for the winding-up himself under Para 79? If a winding-up order were made on the original petition, then S127 would kick in to make certain pre-Administration payments (including a payment of £88,000 to the original petitioner) vulnerable to attack. However, if the Administrator were to seek a winding-up order on a new petition, S127 would only apply from the date of presentation of the new petition.

The judge was reluctant to go to the lengths of substituting the petitioner, which would only incur additional costs. He felt that there was sufficient precedent and support under S122 enabling a court to make a winding-up order without a petition and thus the court had jurisdiction to make a winding-up order on the existing petition and under the powers of Para 79(4)(d). The judge said (although, personally, I do wonder if he is crediting Parliament with a little too much foresight): “In all the circumstances it does seem to me that this court ought to recognise that Parliament must have intended to keep the petition in being for a reason and one of the reasons is so that an order might be made on the suspended petition, taking advantage of the doctrine of relation back, despite any objections of the Petitioner” (paragraph 53). Thus, he allowed the appeal, waived all procedural requirements that had not otherwise been complied with, and granted the winding-up order.

At the time of his bankruptcy petition and afterwards, Mr Kekhman was a Russian citizen, domiciled and resident in the Russian Federation. He had disclosed in the petition that he was going to remain in England for only two days and he wished to be made bankrupt in England, as he had been advised that there is no personal bankruptcy law in the Russian Federation and, in view of the international reach of his affairs, “the English jurisdiction as a sophisticated jurisdiction in these matters appears appropriate to help resolve my affairs in an orderly manner that will be recognised internationally” (paragraph 11).

The matter returned to Registrar Baister, who had made the bankruptcy order, in the format of applications by two major creditors to annul or rescind the bankruptcy on the basis, amongst others, that Mr Kekhman was a ‘bankruptcy tourist’ to England, a place with which he has no real connection, in an attempt to evade Russian law. One of the creditors also contended that, contrary to Mr Kekhman’s indications that his English bankruptcy would be recognised in Russia, Russia would not recognise or enforce the bankruptcy order, which bound Mr Kekhman’s English creditors, whilst allowing his other creditors to collect in his substantial Russian assets.

Registrar Baister mentioned that, particularly in corporate contexts, “the courts here are prepared to countenance what is in reality forum shopping, albeit of a positive, by which I mean legitimate, kind… I do not see why a debtor whose petition is not governed by that restrictive jurisdictional regime should not also be able to invoke an available jurisdiction for a self-serving purpose, provided of course, that he does so properly and there are no countervailing factors to which equivalent or greater weight should be given” (paragraph 104).

Baister summarised Mr Kekhman’s connections with England, largely involving contracts providing for English law and English jurisdiction. He also put some emphasis on the purpose of bankruptcy being the debtor’s rehabilitation, observing that plenty of bankruptcy orders have been granted on English debtors’ petitions in cases where there were no likelihoods of recoveries for creditors. In any event in this case, the report of the Trustee in Bankruptcy, which explained that he was continuing to pursue certain assets, persuaded the judge that there was “utility” in the bankruptcy, Baister did not consider that utility necessarily required there to be a distribution to creditors; he found the prospect of an orderly realisation of the debtor’s assets “more attractive and more constructive that the law of the jungle advocated” by Counsel for the creditors (paragraph 141).

Baister reviewed the expert testimony of three prominent Russian academic lawyers and concluded on the balance of probabilities that the English bankruptcy order was unlikely to be recognised or enforced by the Russian courts. However, this conclusion seemed to work in Mr Kekhman’s favour: the judge noted that “if the English bankruptcy will never be recognised in Russia, then the free-for-all can continue over there in relation to the few assets that might be left over after execution; as to assets elsewhere, all the creditors will be in the same position vis-à-vis one another” (paragraph 142).

Although Baister stated that the arguments were “finely balanced”, he decided that the utility of the bankruptcy order was not outweighed by the creditors’ current complaints, “so that even if this court had known the true position regarding the problems of recognition and resulting from the arrest of the Russian assets, it still could and probably would have made the bankruptcy order on the basis that there was commercial subject matter on which it could operate, it would have enabled Mr Kekhman’s affairs to be looked into, made possible an orderly realisation of his non-Russian assets and assisted his own financial rehabilitation even if only outside the Russian Federation” (paragraph 144).

(UPDATE 14/03/15: JSC Bank’s appeal was dismissed: http://goo.gl/BkoIxd. Although the judge agreed that the Chief Registrar had not applied the correct test, the appeal judge made his own decision that the bankruptcy order ought to have been made. A more detailed summary of the appeal will be posted soon.)

Bank and Receivers entitled to rely on registration of a deficient deed

The Bank pursued repayment of a loan to a Trust and appointed Receivers over a property. Some time later, the Trustees applied to the Registry for cancellation of the charge over the property on the basis that the charge did not comply with the Law of Property (Miscellaneous Provisions) Act 1989, primarily because none of the signatures on the charge were attested. Subsequently, the Bank applied for summary judgment that the Trustees be estopped from denying the validity of the charge.

The judge agreed that the charge had not been validly executed as a deed and therefore it was void for the purpose of conveying or creating a legal estate. However, the charge had been registered. “The effect of registration of the charge was to create a charge by deed by way of legal mortgage” (paragraph 66) but if the Trustees were successful in having the register rectified, this would only operate for the future, not retrospectively. “It follows that acts (such as the appointment of Receivers) carried out by the Bank under the charge prior to any order for rectification and acts of the Receivers are not void as alleged by Mr Waugh. Both the Bank and the Receivers were entitled to rely on the effect of registration of the charge” (paragraph 67).

On the question of estoppel, however, the judge was not persuaded by the arguments that the solicitor for the Trustees had represented the document as executed and on this basis the Bank had lent the monies; because the charge simply had not been executed as a deed, the Trustees were not estopped from relying on the invalidity of the legal charge. However, the judge stated that, notwithstanding the defects, it took effect as an equitable mortgage. Left open for another hearing is the question of whether the Bank will succeed in obtaining an order that the Trustees execute documents to perfect the legal charge.

PwC had been instructed to review a financially distressed group of companies as it explored and pursued a restructuring plan. The restructuring process was successful, but HMRC disputed that the company was entitled to deduct the VAT that it had been invoiced and had paid in respect of PwC’s fees.

The First Tier Tribunal (“FTT”) reviewed PwC’s letters of engagement and terms and conditions, which effectively comprised a tri-partite contract between PwC, the Group, and the “Engaging Institutions” and found that the company, as well as the Engaging Institutions, had requested and authorised the work. However, the Upper Tribunal (“UT”) disagreed with the FTT’s approach; it concluded that the substance of the transactions was that there had been a supply of services by PwC to the Engaging Institutions and that the company had not received anything of value from PwC to be used for the purpose of its business in return for payment.

Although Lady Justice Gloster led the judgment in the Court of Appeal, she was in the minority in concluding that the company’s appeal should be allowed. She felt that the company had required PwC to provide valuable services to it for the purpose of its own business – in her view, the provision of PwC’s services was the only way that the financial institutions could be persuaded to support the company’s attempts to survive and that this was a distinctive supply of services from that supplied to the Engaging Institutions.

Lord Justice Vos, however, saw the economic reality in a different light. He felt that “it was as likely that PwC might have advised the Banks to pull the rug… The substance and economic reality was that PwC was supplying its services to the Banks in exchange for Airtours’ payments” (paragraph 87) and that the UT had been correct to conclude that the company was a party really only for the purpose of paying PwC’s bills, not to receive any service from the firm. Lord Justice Moore-Bick also noted that, although the use of “you” in the terms and conditions suggested that PwC had certain obligations to the Group, they were a standard form document that must be applied in a way that is consistent with the letter of engagement, which is the “controlling instrument” (paragraph 96). The question was “not whether the Group needed the report to be produced or whether it obtained a benefit as a result of its production, but whether in producing it PwC were providing a service to the Group for which the Group paid” (paragraph 99). The majority of appeal judges decided that the service was not provided to the Group and thus the company could not reclaim the VAT input paid on PwC’s bills.

(UPDATE 14/03/15: permission to appeal to the Supreme Court has been granted.)

Two directors had been found guilty and sentenced in a criminal court, which had also been asked to consider disqualification orders, but because the matter had slipped the mind of prosecuting counsel at the original trial, this was dealt with only some two months later. The judge declined to make such orders, feeling that it would be “perhaps kicking a dog whilst he is down” (paragraph 14).

The SoS later applied to the High Court for disqualification orders under S2 of the CDDA86. S2 provides that the court may make a disqualification order where the person is convicted of an indictable offence in connection with the promotion, formation, etc. of a company. The two year timescale for the SoS to apply for disqualification orders under the usual S6 of the CDDA86 had expired.

Counsel for the directors argued that the application was an abuse of process: the High Court was being “asked to exercise exactly the same jurisdiction as the criminal court but to decide the matter the other way” (paragraph 15). The argument for the SoS was that he had not been party to the prosecution and so had not had an opportunity to contest the original decision.

Although David Cooke HHJ recognised that the SoS was not a claimant seeking to vindicate a private right, but a restriction for the public good, he also considered what was fair to the directors. He noted that there was a wide range of potential applicants under S2 of the CDDA86, including company shareholders and creditors: “Fairness to the defendant must mean, it seems to me, that he should not be exposed to the same claim on multiple occasions by different litigants unhappy with the outcome of the earlier claim or claims” (paragraph 51) and that such subsequent claims could be described as “collateral attacks” on the first decision.

Even though the judge said that, in this case, he would have made disqualification orders (if he were found wring on the issue of abuse of process): “standing back, this claim is no more than an attempt by the Secretary of State to obtain a different decision from this court than was given on identical issues by the criminal court, which had the issues placed before it and made a positive decision to refuse an order. It is in my view unfair that the defendants should be thus exposed to the same claim on two occasions. The unfairness is not relieved by the argument that the claim is being pursued by a different entity… There is the general point that where the basis of the claim and the relief sought is essentially identical it is just as much unfair to the defendant to have to face it twice at the hands of two applicants as it would be if there were only one” (paragraph 52).

As we cling to the last vestiges of summer, I thought I should summarise the last few months’ judgments. I’m sure you’ve seen write-ups on the Blue Monkey Gaming v Hudson RoT case, but I’ve not seen the full judgment yet, so I have nothing useful to add. However, here are some other cases:

Coventry v Lawrence – it’s not only Jackson that threatens IPs’ use of CFAs and ATE insurance

Top Brands v Sharma – how much digging should an IP do pre-appointment?

BAJ v SDS & AS (Scottish case) – is proof of sending sufficient to meet a requirement to inform, or is it proof of receipt?

Kaupthing Singer & Friedlander v UBS – do the manic first few days of an administration excuse misunderstanding balances of account?

This case does not involve insolvency directly, but, as Anton Smith, Ashton Bond Gigg, highlighted in a LinkedIn post (http://goo.gl/dIHyPi), it could have repercussions in the insolvency world.

Lord Neuberger was struck by the “very disturbing” figures involved in this case. A home-owning couple took proceedings in relation to the noise emanating from a nearby speedway racing track. Eventually, the couple were awarded damages of c.£10,000 and the respondents were ordered to pay 60% of the couple’s costs. The couple’s costs (including their solicitors’ CFA uplift and ATE premium) amounted to over £1 million.

The respondents argued that the order that they pay 60% of the success fee and ATE premium infringes their rights under article 6 of the European Convention on Human Rights. Interestingly, the judge pointed out a perverse (my word, not his) consequence in cases involving success fees and ATE premium: these elements will be higher for parties with seemingly weaker cases, and so parties who lose against apparently weaker opponents end up having to pay larger sums than those who lose against stronger opponents. That certainly does not seem fair to me.

Because it is possible that the government could end up dealing with compensation claims from past “victims”, if it is found that the Convention has been breached, the Supreme Court decided that the appeal should be re-listed for hearing so that the Attorney General and Secretary of State for Justice can be notified.

This decision could affect litigation brought pursuant to CFAs made prior to April 2013 (i.e. pre LASPO Act 2012) with the effect that Courts could no longer be able to order that the CFA uplift and ATE premium be paid by the losing party.

(UPDATE 19/11/2014: this case is listed to be heard by the Supreme Court on 9 and 10 February 2015.)

(UPDATE 24/03/2015: Judgment is expected from the Supreme Court in July this year. For an excellent analysis (both by Kerry Underwood and the many contributors of comments) of the dilemma facing the Judges, I recommend: http://goo.gl/o8CSIs. Hill Dickinson has also posted a summary of the submissions to the Supreme Court: http://goo.gl/wSH2Qz.)

In this hearing of a S212 proceeding against a former liquidator, the judge seems to have acknowledged that the IP appears to have been the victim of a fraud by having been deceived into paying out over £500,000 of estate funds, which she had been led to believe were trust monies. The judge commented on where the IP seemed to have gone wrong:

The IP’s enquiries pre-liquidation had been lacking: she had not enquired into the demise of the company (“MML”) further than the shadow director’s indication that it had been as a consequence of MML’s trading with a company subject to a SOCA investigation; she had not enquired into the “unusual” appointments and resignations of directors; she had not noticed the inconsistency in information about MML’s bankers, which should have been apparent from documents received by her; and she had not made contact with MML’s accountants pre-liquidation.

Had she reviewed the small amount of company records received pre-liquidation, she would have noted substantial transactions that did not stack up with the director’s explanations of MML’s trading, including the date that MML allegedly began trading.

The IP might also have made more enquiries into MML’s VAT position, including asking the director for figures for the outstanding VAT return, and she might have questioned the nil VAT output stated on previous returns.

MML’s financial statements also showed wage payments, but the IP did not seek any PAYE/NI records or ask about any wage-related liabilities, which the judge thought “ought to be standard [enquiries] for any competent insolvency practitioner in the process of taking on a new appointment and preparing a statement of affairs” (paragraph 84).

The judge criticised the deficiency account, revealing the “elementary error of double counting” and describing it as “fundamentally flawed and meaningless”.

But how much work is expected of an IP pre-appointment? “Accepting that there is no duty on a liquidator designate to investigate the affairs of a company before appointment, any insolvency practitioner taking on the role of liquidator of MML must – or should – have appreciated that reviewing the available information and obtaining further basic, objectively reliable information (in particular bank statements and copy returns to HMRC) at a very early stage would be essential to the due performance of a liquidator’s duties” (paragraph 93).

Unfortunately for the IP (“GS”), her inquisitiveness does not seem to have become piqued even after appointment as liquidator; the judge related several other events that should have triggered warning bells, leading him to conclude: “On my findings GS conducted the liquidation of MML with a lack of thought and purpose tantamount to indifference as to the ascertainment of MML’s true obligations. GS’s approach may, on the facts, fairly be characterised as a conscious disclaimer or disregard of responsibility for the assets in her charge on a material scale. In my view, such conduct crosses the border into the territory of breach of fiduciary duty, and were it necessary to my judgment, I would so find” (paragraph 144).

(UPDATE: the judgement on the appeal was given on 10/11/2015 ([2015] EWCA Civ 1140). GS pleaded that the misfeasance claim was based on compensation for loss of criminal property (because the company had been engaged in VAT fraud before its liquidation) and thus the claim should be barred. The judge decided that there was no causative relationship between the company’s illegal actions and GS’ actions that were the subject of the loss and so dismissed the appeal. )

Compliance with a requirement to “inform” should be considered from the perspective of the recipient, not the sender

Sheriff Foulis considered a Trustee’s application for possession and sale of a property under S40 of the Bankruptcy (Scotland) Act 1985, which was defended on the basis that he had not informed the bankrupt’s non-entitled spouse of the right to petition for recall of the sequestration within the period specified under S41(1)(a).

The sheriff highlighted the difference between “inform” and “notify”: “In my opinion ‘inform’ must involve bringing the matters covered by section 41 to the attention of the non entitled spouse in order that that person can take steps to protect these rights if so desired… The obligation to inform in terms of the section has to be looked at from the point of view of the non entitled spouse rather than the trustee. If it is not proved that the necessary information was received [by] that spouse, then the obligation in terms of the section has not been satisfied. There will be numerous ways in which that obligation can be performed. The information could, for instance, be given in a meeting with the non entitled spouse or by correspondence, written or electronic. It might even be satisfied if the information was given to a professional known to be currently representing that person. The less formal the means of communication, however, the more difficult it may be to counter an assertion that the non entitled spouse never received the information.”

In this case, the sheriff was not satisfied that the non-entitled spouse had received a letter apparently sent by the Trustee’s office. Although the spouse had received the information, albeit around 3 months later, and the sheriff concluded that, in all the circumstances, had S41(1) been complied with, it would have been appropriate to have granted the Trustee authority to sell the property, he declined to grant the decree (although the final outcome depends on whether the Trustee applies for relief in relation to the defect under S63 or whether the action is dismissed on the basis that it is incompetent).

Just before Kaupthing Singer & Friedlander Limited (“KSF”) went into administration on 8 October 2008, it had expected to receive US$65 million from UBS AG (“UBS”), but the sum had been paid, via JP Morgan Chase (“JPMC”), by mistake to Kaupthing Bank hf (“Khf”). Later, in November 2008, Khf went into liquidation without having paid over the $65 million to anyone.

Over the subsequent years, there were exchanges between Khf, KSF and UBS to reach agreements on other matters, but, in calculating the accounts between the companies, it seems that no thought had been given to the question of the $65 million; settlements in relation to these other matters were achieved in December 2010 and May 2012.

KSF first claimed the $65 million from UBS in August 2012.

The judge accepted UBS’ contention that KHF was estopped by convention from claiming that UBS’ payment obligation to KHF had not been discharged. He said that “the communications between KSF and Khf on the one hand and UBS on the other hand were conducted through JPMC, and, in my judgment, those communications and in particular the message from JPMC of 9 October 2008 [regarding the planned reversal of the payment made to Khf] satisfy the requirement of estoppel by convention that communications ‘cross the line’” (paragraph 95).

But couldn’t it be argued that, in the early days of the administration, the administrators were so preoccupied with getting to grips with a company in crisis, they could not be expected to know anything much at all about the position between the companies and thus KSF could not be held subject to estoppel by acquiescence? The judge acknowledged the “enormous task” facing the administrators and accepted that they themselves had no knowledge of the transaction. However, he was not persuaded that this affected the ability of those in the “back office” to communicate with UBS in a normal business-like way. In his judgment, it would be unjust to allow KSF to resile from the position to which KSF had been taken to have acquiesced.

A borrower had appointed a company to act as its service agent in relation to any proceeding in connection with the loan. The judge was of the “clear view” that service of the lender’s claim had been good, despite the fact that the agent had been placed into CVL before the claim had been served… and despite the fact that the lender had known about the liquidation, but “what was not known was that the liquidators had ceased to be involved in performing their functions as such. However, the company had not been struck off the register” (paragraph 3).

Admittedly, the judgment was obtained in default, as the borrower had not filed any defence, and I can see the argument that, technically, the lender was bound to follow the borrower’s instructions as regards their service agent. Nevertheless, it sits a little uneasy with me that service on a company in liquidation (especially where the liquidators had vacated office) can be relied upon.

As a consequence of the companies’ administration, British Gas Trading Limited (“British Gas”) terminated their contracts, but it continued to supply gas and electricity to the Peacocks stores under contracts deemed to arise under the Gas Act 1986 and the Electricity Act 1989.

The administrators paid for supplies provided after their appointment, but only up to the point that the stores were vacated. Some landlords did not accept surrenders of the leases, but eventually the companies were placed into liquidation and the leases were disclaimed. In the meantime however, British Gas’ fixed charges continued to accrue and it seems that gas and electricity continued to be used at the premises, resulting in a liability of £1.2 million. British Gas argued that this should be paid as an administration expense on the basis that the deemed contracts came into existence after the administrators’ appointment, but the administrators argued that it ranked as an unsecured claim.

The judge highlighted the differences between deemed contracts arising under the Acts and an express contract entered into by an administrator: an express contract contains all the terms and conditions agreed by the parties, but neither the Gas Code nor the Electricity Code specifies the terms and conditions deemed to be made between the parties; neither are these negotiated, but they – including terms relating to tariffs, duration and termination – are determined and imposed by the supplier.

The court decided that the liability ranked as an unsecured claim: the moment that the consumer/owner-occupier began to receive supplies, it became bound by the framework of the two Acts, which included a contingent liability to pay for supplies pursuant to a deemed contract where the supply was otherwise than in pursuance of an actual contract. Thus, the companies incurred the post-appointment liability by reason of an obligation incurred pre-appointment.

Another one to look out for: ECJ decides pay must take account of commission not earned during holiday period

Mr Lock was paid a basic salary plus commission payable several weeks or months following the completion of the sales contracts. When Mr Lock took holiday, he was paid his basic salary plus commission maturing in relation to earlier sales. However, of course, he did not make any sales during his holiday period, which meant that, in the period after his return from holiday, his take-home pay was decreased from that he would have received had he not taken his holiday.

The European Court of Justice decided that Article 7 of Directive 2003/88/EC must be interpreted as precluding national legislation and practice under which a worker in this position is paid holiday pay composed exclusively of his basic salary, although they left it to the national court or tribunal to decide how to calculate what his holiday pay should be in these circumstances.

The case was referred to the ECJ by the Leicester Employment Tribunal, but I have not seen any reference to the ET having yet decided the case as a consequence of this decision. (UPDATE 04/01/2015: I’ve seen a rumour that the Leicester Tribunal will be hearing the case in February 2015; see, for example, http://goo.gl/ezx8Qj.)

In August 2013, the administrators formally rejected a creditor’s claim on the basis that, a year earlier, they had informed the creditor that they believed the contract had been with an associated company, not the company in administration, and, despite their request, the creditor had provided no further information in support of its claim. By consent, the 21 day time period in which the creditor could appeal to court to reverse or vary the administrators’ decision was extended three times. However, in January 2014, the administrators refused a further extension, resulting in the creditor applying to court for such an extension.

The court rejected the creditor’s request, stating that there is “clear public interest in ensuring as efficient and expeditious an administration of an insolvent estate as can reasonably be achieved. This suggests the need for all interested parties to comply with the time limits specified in the Rules, unless there are good reasons for requiring more time. Some minor delays may be tolerable but anything more will, in the absence of good reason, undermine the proper administration of the estate, to the detriment of the creditors generally and others with an interest in the estate” (paragraph 14). The judge felt that there was no good reason in this case and that the creditor had been “seriously dilatory in its attempts to support its claim” (paragraph 42).

Responding to the creditor’s argument that the administrators still had much to do on the case, the judge pointed out that, if the administrators were to take a relaxed attitude towards the creditor, they would be required to treat all other claimants similarly, which “would result in wholly unacceptable delays in dealing with the administration” (paragraph 43).

A couple paid a 10% deposit for a flat yet to be built. They later wrote to the vendor asking for the return of the deposit on the basis that it had failed to complete the construction, resulting in a repudiation of the agreement. Later, the vendor was placed into administration, which then moved to dissolution. Zurich Insurance Plc (“Zurich”) refused to pay out under the policy, which covered a loss of deposit “due to the developer’s bankruptcy, liquidation or fraud”. Zurich argued that this did not reach to the developer’s administration and that, for a claim to be made, the developer’s failure to complete the new home must be because of its liquidation, but in this case the failure to complete was due to the purported acceptance of the company’s alleged repudiatory breach.

Seemingly just before the hearing, Zurich did accept that dissolution would be sufficient to trigger cover under the policy, so the issue of whether insolvent administration was covered was shelved (handy – there may not be many CVAs arising from administrations, but perhaps it is no wonder that Zurich did not want to go there).

The judge observed that a developer’s failure to complete a construction is rarely going to be “due to” its liquidation, but rather due to the “actual or impending insolvency of the developer beforehand” (paragraph 27), although he accepted that insolvency alone would not engage the policy; the final liquidation terminates any possibility of the construction being completed. He continued: “there is no obvious or logical reason why there should be a distinction between the two types of purchaser; one has the purchaser who is prepared to wait or who can not be bothered to do anything about the failure to complete the work and the purchaser who feels that he or she can not wait possibly for a very long time” (paragraph 28). Thus, he decided that the fact that the purchasers accepted a repudiation was not a bar to recovery under the insurance policy.

The court found that the defendants dishonestly assisted the company’s sole director and shareholder in a breach of his fiduciary duties as regards the misapplication of the company’s money.

Two defendants claimed to have suffered considerably as a consequence of the director’s fraudulent activity, but the judge decided that they could not set off their losses against the misfeasant payments made to them on the basis that they were not to be treated as “dealings” under R4.90. The judge also rejected the defendants’ argument that the court was not entitle to unravel set-offs that had occurred before administration; the defendants would have to attempt to prove in the company’s liquidation for sums owed in relation to flights arranged for the company. In his judgment, this was the risk the defendants took when, having assisted the director in the misapplication of the company’s funds, they then allowed the company to deduct sums from the monies otherwise due for flights.

The IPA has published an interesting article in its July 2014 magazine (accessible from http://www.ipa.uk.com Press & Publications>Insolvency Practitioner magazine) explaining how its Personal Insolvency Committee believes the judgment in Kaye v South Oxfordshire District Council impacts on past and future IVAs. I have some more thoughts…

The article points out that the judgment has no practical effect where the household income is shared between solvent and insolvent adult occupiers, because whatever “tax holiday” might be enjoyed by an insolvent occupier will be off-set by the fact that the council likely will re-bill the solvent occupier, with the effect that the household income and expenditure account is unchanged. The rest of this post assumes that the debtor is the sole adult occupier (although perhaps some points also might apply where all the adult occupiers are – or are intending to be shortly – in an insolvency process; I’ve not worked out whether a council’s “re-bill” of another occupier would be a pre- or post-insolvency liability…).

For new IVA Proposals, on the basis that the first (part) year’s council tax will be caught as an unsecured claim, the article states that “it may be advisable to consider… whether the proposal might make specific provision for an increased contribution during this period”. Fair enough. I hear that many IPs are doing this already.

For existing IVAs, however, the tone of the article makes it clear that there is no expectation for Supervisors to examine potentially overpaid council tax with a view to recovering any overpayment. The article goes so far as stating: “It is also believed that Counsel has expressed a view that this judgement would not be of retrospective effect”, which I find quite extraordinary. However, there is no doubting the commercial arguments against the Supervisor going to the effort of seeking to extract small refunds from a number of councils.

Of course, the IPA article is aimed at helping its members, so it is not surprising that it has not viewed the position from the debtor’s perspective. For example, could the debtor pursue a refund? I don’t see why not (although I’m not sure I rate their chances of easy success). Would it be a “windfall” caught by the IVA? I don’t see how, as it simply refunds the debtor for payments made post-IVA; it isn’t an asset that has been acquired after the IVA started.

Would the council be entitled to set off any refund due to the debtor (for council tax paid post-IVA) against the council’s unsecured claim? I don’t think so; set-off principles in insolvency apply only where the overpayment and the claim both occurred pre-insolvency, although I appreciate that this is not what the pre-January 2014 Protocol STC stated. Clause 17(6) used to say: “Where any creditor agrees, for whatever reason, to make a repayment to the debtor during the continuance of the arrangement, then that payment shall be used solely in reduction of that creditor’s claim in the first instance”. However, the January 2014 Protocol STC now state: “Where Section 323 of the Act applies and a creditor is obliged, for whatever reason, to make a payment to you during the continuance of the arrangement, then that payment shall be used first in reduction of that creditor’s claim”. S323 begins: “This section applies where before the commencement of the bankruptcy there have been mutual credits, mutual debts or other mutual dealings between the bankrupt and any creditor of the bankrupt proving or claiming to prove for a bankruptcy debt”… so as long as the debtor doesn’t become bankrupt, I don’t think S323 will ever apply in an IVA!

What about debtors who are in the first year of their IVAs (provided the IVA commenced after 1 April 2014)? Can they avoid paying the remaining council tax for the rest of the year on the basis that it now falls as an unsecured claim? Excepting the IPA’s comment that the Kaye judgment does not have retrospective effect, it seems that they can. Some words of caution, however: I can envisage that some councils may be a bit behind the times, so debtors may need to have a strong stomach to resist council pressure to pay up, remembering that a case precedent only exists to the point that another court sees things in a different light. The effect of pushing the year’s tax into the IVA might also be material: for example, the Protocol STC state that breach occurs when the debtor’s liabilities are more than 15% of that originally estimated and some IVAs may require a minimum dividend to be paid. If an increased council IVA claim could threaten the successful completion of an IVA containing terms such as these, one might like to think again…

Could a Supervisor demand increased contributions from a debtor who is not paying his council tax for the rest of the first year? Of course, it will depend on the IVA terms, but it seems to me that the Protocol STC don’t help a Supervisor seeking to do this. Clause 8(3) states that the debtor must tell his Supervisor asarp about any increase in income… but this is not an increase in income, it is a decrease in expenditure. Clause 10(11) states that, as a consequence of the Supervisor’s annual review of a debtor’s income and expenditure, the debtor will need to contribute 50% of any net surplus one month following the review. By the time the first annual review comes around, the “tax holiday” will have ended and the debtor again will be required to pay council tax, so the I&E will show no consequent surplus. Therefore, as far as I can see the Protocol STC do not provide for the Supervisor to recover any surplus arising from a decrease in expenditure in the first year of the IVA. Of course, this does not take into consideration the terms of the Proposal itself (or any variations in the standard, or any modified, terms) and the debtor can always offer the unexpected surplus to the Supervisor, which one would hope would go down well with the IVA creditors.

. For background on the judgment itself, you might like to take a look at my earlier post – http://wp.me/p2FU2Z-5U – or R3’s Technical Bulletin 107.1.

(UPDATE 25/08/14: for another perspective, I recommend Debt Camel’s blog: http://debtcamel.co.uk/council-tax-insolvency/. Sara highlights the difference in DROs (I think the reason this decision has no effect on DROs is because the remainder of the year’s council tax is a contingent liability and as such is not a qualifying debt for DRO purposes) and the possibility of debtors putting in formal complaints if the council does not acknowledge the effect of this decision.)

Mr Pathania obtained judgment against Dr Adedeji at a time when the court did not know that Mr Pathania had been made bankrupt six months earlier. Dr Adedeji appealed on the ground that a bankrupt claimant cannot maintain legal proceedings under his own name, but these should have fallen to his trustee.

Although the bankruptcy order had been made in June 2010 – and the judgment made in December 2010 – it was not until April 2011 that an IP was appointed. The questions arise: what was the status of the OR in December 2010? Was he a trustee or simply the receiver and manager of the estate pending appointment of a trustee? The questions are important, as S306(1) provides that the bankrupt’s estate vests in the trustee on his appointment or when the OR becomes trustee. S293(3) provides that the OR becomes trustee when he gives notice of his decision not to convene a meeting of creditors. So when did the OR give such notice, if he ever did?

Lord Justice Floyd, using “moderate language”, stated that it was “highly unsatisfactory that the question of whether or not Mr Pathania’s assets had vested in a trustee should still be shrouded in any degree of mystery” (paragraph 50). Granted, it seems to have taken three or four years for the importance of the timing of the vesting of the bankrupt’s estate to have been appreciated; this seems to have been time enough for holes to develop in the OR’s records. The OR’s system suggested that he became trustee of 28 August 2010 and the file contained an undated report to creditors (although it seems that it may have been under cover of a letter dated 23 August 2010), which referred to a notice ‘attached’ but there was no attachment, leading the judge to states that “there is, as it seems to me, still no clear evidence that the formalities necessary for the appointment of the official receiver as trustee were complied with in this case” (paragraph 51). He also noted other indications in the case that he was not so appointed, including the document appointing the IP as trustee, which “contains no reference to a previous trustee or his discharge” (- does it ever?).

Although the judge was not persuaded on the evidence that the OR had become trustee around August 2010, he noted that this was not the be-all and end-all: Dr Adedeji “must show that Mr Pathania knew that the official receiver had become trustee, that his estate had become vested in the official receiver and that he knew that was so before judgment on the claim was entered” (paragraph 53). He also observed that, had Mr Pathania’s bankruptcy been disclosed before judgment, the action likely would have been stayed and, given that the (IP) trustee later assigned the action to Mr Pathania, the chances are that he would have been authorised to continue with it sooner or later. Consequently, De Adedeji’s appeal seeking to have the judgment set aside was dismissed.

Error or deliberate contrivance: either way, the clock didn’t tick whilst the director withheld information from his company

The liquidator brought proceedings against the company’s two directors for breach of fiduciary duties in depriving the company (“SMT”) of c.£750,000 and breach of the common law duties to exercise reasonable skill, care and diligence in relation to the SMT’s payment of a dividend at a time when it had insufficient distributable assets to justify it.

SMT had ceased trading in late 2001, but it had not been placed into liquidation until September 2005 (as an MVL, which converted into CVL in March 2007). The transactions challenged by the liquidator occurred in September and November 2001. The liquidator had been given leave to bring proceedings in January 2009. At first instance, although the Lord Ordinary had held that the director/respondent had been in breach of his duties, he dismissed the principal action as he had concluded that the claims “had prescribed”, i.e. they were out of time as a consequence of the Prescription and Limitation (Scotland) Act 1973, which provides a time limit of 5 years.

Section 6(4) of the 1973 Act states: “In the computation of a prescriptive period in relation to any obligation for the purposes of this section: (a) any period during which by reason of
(i) fraud on the part of the debtor or any person acting on his behalf, or
(ii) error induced by words or conduct of the debtor or any person acting on his behalf,
the creditor was induced to refrain from making a relevant claim in relation to the obligation… shall not be reckoned as, or as part of, the prescriptive period”.

The Inner House judges concluded that this section applied in this case: SMT had been induced to refrain from making a claim by error induced by the director’s conduct and also by fraud on his part. Therefore, the commencement of proceedings in January 2009 was well within the period of 5 years from the winding-up in 2005. The judges added that it was also possible that the delay during which SMT was induced not to make a claim continued throughout the MVL until it had been converted into CVL.

The court explained it this way: “if the respondent was unaware of SMT’s right to make a claim for breach of fiduciary duty, the result following the rules of attribution is that the company was in error as to its legal rights and section 6(4)(a)(ii) applies. If the respondent was aware of SMT’s right to make a claim against him, his failure to alert to the company to its right was a deliberate contrivance to ensure that his breach of fiduciary duty was not challenged… That in our opinion falls within the concept of fraud, in the sense of a course of acting that is designed to disappoint the legal rights of a creditor, SMT. In our view that falls squarely within the underlying purpose of section 6(4), namely to excuse delay caused by the conduct of the debtor. As a result of the respondent’s failure to draw attention to SMT’s rights, SMT was induced to refrain from making a claim. It follows that either SMT’s inaction was the result of an error induced by the actings of the respondent, or it was the result of the respondent’s failure to inform the company of its rights (“fraud” in the technical sense described above). Either way, the prescriptive period does not run” (paragraph 31).

Two IPs were prepared to act as administrator of a partnership: one was the nominee of the partners’ proposed interlocking IVAs that had been rejected; and the other was the choice of the largest creditor. There are no prizes for guessing which of the two IPs had the court’s favour, but I thought this case serves a useful reminder.

Although it could be argued that the nominee had acquired valuable knowledge of the partnership and its assets, the judge did not feel that the costs of getting the other IP up to speed was going to make a fundamental difference. He considered that “the choice of the only (or main) creditor should carry great weight” (paragraph 16).

The judge wanted to emphasise that there was no suggestion of actual bias on the nominee’s part, but he felt that apparent bias did exist. He described this generally (per Porter v Magill (2002)) as “‘where the fair-minded and informed observer, having considered the facts, would conclude that it was a real possibility of bias’… In some cases the circumstances may be such where the directors’ nominee is in a position where the issue of apparent bias can arise because of his previous dealings with the directors. In such circumstances, even where he has acted blamelessly, he should stand down” (paragraph 15).

Court satisfied that Administrators’ marketing and sales process led to fair and proper price

Online articles (e.g. http://www.mercerhole.co.uk/blog/article/administration-fixed-charge-creditors-rights) have highlighted the key outcome of this case: the dismissal of the charge-holder’s appeal against the order under Para 71 permitting Administrators to sell assets as if they were not subject to the fixed charge. The judgment is valuable in illustrating how the court measures the fine balance between the prejudice to the charge-holder caused by an order and the interests of those interested in the promotion of the purposes of the administration.

The other points that I found interesting in the judgment are:

• The judge had to be (and was) satisfied that the Administrators were proposing to sell the assets for a “proper price” (paragraph 49). Absence of reference to “best price” is interesting to me, in view of the fact that the Administrators did not pursue a somewhat tentative sale to a party, who on the face of it was offering a larger sum (but which would have involved deferred consideration due from an overseas company). Personally, I have never liked the concept of achieving a “best price” sale; apart from the practical difficulties of measuring against a superlative “best”, it’s not just about the quantum.
• In the circumstances – limited cash, ongoing liabilities to 17 employees, and quarter-day rent looming – the Administrators could not be criticised for deciding to pursue a sale by means of a contract race.
• Although the appellant argued that the company’s intellectual property rights were valued at “very substantially more than the Administrators achieved” (paragraph 62), the judge was “satisfied that the Administrators did ascertain the value of the business and assets of the company, including its intellectual property rights, such as they were, by testing the market, and doing so in a perfectly sensible and adequate way. Faced with rising costs and diminishing assets, they were naturally concerned to secure a sale as soon as reasonably possible. That is precisely what they did and I am satisfied that, in doing so, they obtained a proper price” (paragraph 63).
• Although the judge recognised “that the urgency of the situation and commercial pressures will sometimes require administrators to make a decision before a meeting [of creditors] can be convened. But in any such case it may still be possible for the administrators to consult with the creditors and, so far as circumstances permit and it is reasonable to do so, that is what they should do” (paragraph 80).

Fons made unsecured loans to Corporal Limited under two shareholder loan agreements. The question for the Court of Appeal was: did the loans fall under Fons’ charge-holder’s security, either as “debentures” or “other securities” under the charge’s definition of “shares” (“…also all other stocks, shares, debentures, bonds, warrants, coupons or other securities now or in the future owned by the chargor in Corporal from time to time or any in which it has an interest”)?

Having reviewed the historic use of the word debentures, Patten LJ concluded: “As a matter of language, the term can apply to any document which creates or acknowledges a debt; does not have to include some form of charge; and can be a single instrument rather than one in a series” (paragraph 36). It seems that the previous judge gave “debentures” a narrower meaning because it appeared in a list ending: “other securities”. However, Patten LJ pointed out that other items in that list may be considered a security, if “securities” is synonymous with “investments” and thus he could not see why a reasonable observer should regard “other securities” as limiting “debentures” to a meaning that would exclude the shareholder loan agreements. The appeal judges were unanimous in the decision to allow the appeal.

The implications of this judgment have been summarised in a letter from the City of London Law Society to HM Treasury dated 4 June 2014 (http://goo.gl/2F9tpH). The Society wished to raise its “serious concerns in respect of the significant legal uncertainty” caused by this decision: “In holding that loan agreements are debentures in that, whether or not the relevant loan is drawn, the agreements acknowledge or create indebtedness, the judgment appears to have the effect of regulating loans in a manner not previously adopted.”

The Society’s key concern is that, if loan agreements are debentures, then they could be caught as regulated investments under the Financial Services and Markets Act 2000 (“FSMA”). If this is the case, then unless a party is authorised or exempt under the FSMA, they are at risk of criminal sanctions – this might apply, not only to unregulated lenders, but also borrowers as well as secondary traders of loans.

Consequently, the Society has asked the Treasury to “take action (a) immediately to clarify HM Treasury’s policy intentions on this topic and (b) as soon as practicable act so as to provide clarity in law.”

(UPDATE 25/08/14: The Society has released a copy of the FCA’s response to the Loan Market Association (17/07/14), which states that the FCA has considered the judgment in this case and, in the FCA’s view, it does not impact the regulatory perimeter prescribed by the FSMA: http://goo.gl/vO99NT )

(UPDATE 31/08/14: well, it was there! It seems to have been pulled down again; I don’t know if that means the FCA has had second thoughts…)

The Registrar of Companies (“RoC”) applied to set aside an order that the administrators’ original Proposals be removed from the register and replaced with another set of Proposals, which omitted certain information in view of a confidentiality clause in a share purchase agreement.

The RoC’s central challenge was whether, and to what extent, the court could intervene in the performance of the RoC’s duties and powers: the RoC had carried out its duty in registering the Proposals that had been delivered to it and the original Proposals had not been found to be non-compliant or containing “unnecessary material” (per S1076 of the CA 2006) and thus in want of removal and replacement. Accordingly, it was argued, the RoC had no statutory power to accept the amended Proposals as a replacement and could not be required to do so.

Does R2.33A, which provides for an administrator to apply for an order of limited disclosure in respect of Proposals, only apply in advance of filing? In other words, once Proposals have been filed, is it too late to apply for a R2.33A order? The judge stated: “in my judgment on the correct construction of Rule 2.33A the jurisdiction of the court to make an order limiting disclosure of the specified part of the statement as otherwise required by Paragraph 49(4) is not exhausted the moment the statement has been sent. On the contrary, an application for such an order may be made even after that event, and an order may be made with retrospective effect” (paragraph 52).

But how does such an order fit in with the RoC’s powers under the CA2006 as regards removing documents containing “unnecessary material” from the register? The judge’s conclusion was that the effect of the R2.33A order was to render the disputed material as “unnecessary material” under the CA2006 and thus the RoC was empowered to remove it.

I have seen other commentaries on this case focus on the repercussions of being slow in dealing with court matters, but I will look at the case’s once-in-a-blue-moon technical intricacy.

A liquidator rejected a creditor’s claim, the creditor appealed to court, and then the two of them submitted to a consent order by which the liquidator reversed her decision to reject and agreed to admit the claim. The liquidator, having been replaced by another IP at a creditors’ meeting, now faces a S212 action. The (now former) liquidator sought to adjourn the trial so that she could pursue a claim to set aside the consent order on the basis that it was procured by fraudulent misrepresentation. If the creditor’s claim were to be rejected, then its standing to pursue the S212 application might be thwarted.

The difficulty for the former liquidator was that R4.85 sets out who can apply to have a claim expunged: the liquidator or (where the liquidator declines to act) the creditor. As the former liquidator was neither, she had no jurisdiction. Simon Barker HHJ accepted that “such a conclusion would be troubling in the light of there being a real prospect that neither [of the two applicants] are creditors” (paragraph 48), but for the facts that the current liquidator, who was still investigating matters, had jurisdiction and the former liquidator had “a reasonable window of opportunity” to take action under R4.85 after the S212 application had commenced but before she had been removed as liquidator. He also stated that, even in the event that the current liquidator did not intend to investigate the matter (although, of course, the liquidator will be duty-bound to satisfy himself that any distributions made by him are made to genuine creditors), “the court simply does not have jurisdiction to act in disregard of R4.85”.

HMRC detained the companies’ goods, citing S139(1) of the Customs & Excise Management Act 1979 as their authority for doing so, but they later returned some of the goods when the officers’ enquiries as regards the goods’ duty status proved inconclusive. In the Eastenders case, the court had previously found that the officers had had reasonable grounds to suspect that duty had not been paid on the goods, but in First Stop’s case, the goods were detained pending investigations into whether duty had been paid. The question arising was: could only goods that were actually liable to forfeiture be detained, i.e. was it unlawful for HMRC to detain goods that turned out not to be (or not proven to be) liable to forfeiture?

The Supreme Court judges all agreed that S139(1) of the 1979 Act should be interpreted so that “detention of goods is unlawful whenever the goods are not in fact liable to forfeiture” (paragraph 24). The difficulty flowing from this is that, of course, at the time of detention, officers may well suspect that the goods are liable to forfeiture, but further enquiries sometimes will establish that this is not the case. Hindsight is a wonderful thing!

But does this mean that the officers had no statutory power at all to detain the goods? In creating the S139(1) power of detention, was the power to detain, which had previously been held to arise by necessary implication from statutory powers of examination, abolished? The judges could not see “why Parliament should have conferred upon the Commissioners and their officers a wider range of intrusive investigatory powers than any other public body, but should at the same time have chosen to deprive them of a means of preventing goods from being disposed of until they have completed their examination and decided whether the goods should be seized” (paragraph 45).

Consequently, the Supreme Court judges concluded that the limited circumstances in which goods could be detained under S139(1) was not the only source of the officers’ powers of detention. In the Eastenders case, “since the officers were carrying out a lawful inspection of the goods for the purpose of determining whether the appropriate duties had been paid, and had reasonable grounds to suspect that duty had not been paid, they were in our view entitled by virtue of section 118C(2) to detain the goods for a reasonable period in order to complete the enquiries necessary to make their determination” (paragraph 49). Even in the First Stop case, the judges considered that “the examination was not completed until the necessary enquiries had been made, and that the power of examination impliedly included an ancillary power of detention for a reasonable time while those enquiries were made” (paragraph 49).

The R3 Technical Bulletin 107 has covered this case, which resulted in a direction that administrators assign potential mis-selling claims to the shareholders (one of which was also a creditor). As the Bulletin pointed out, the judge did not criticise the administrators for declining to pursue the claims themselves, but he felt that, as the terms of the proposed assignment included that the estate would share the benefit from any success, it would unfairly harm the creditors if the claims were simply lost and thus he felt that there was a basis to the creditor’s Para 74 claim.

A further point that I found interesting in this case was the judge’s reaction to the administrators’ criticism of the consideration offered under the proposed assignment. The judge could see no practical alternative to effecting the assignment in the terms proposed: once the court had expressed itself in favour of an assignment, faced with no other potential assignees the administrators had no real negotiating position, and the court could not compel the shareholders/creditor to fix the consideration at a higher figure.

So what is the truth about the Comet Tribunal? Could the IPs be facing prosecution? Is the problem simply that the consultation legislation is impossible to meet in most insolvency situations or are there lessons to be learnt for IPs faced with potential redundancies, massive or moderate?

It has to be admitted that Deloittes were handling a massive case – almost 7,000 employees scattered over 250 establishments UK-wide in a high profile company attracting enormous press and public attention at a time when the high street seemed to be suffering the loss of one big name after another. But isn’t that what the Big 4 get paid the big bucks for?

The dilemma for IPs has often been described as being faced with a plethora of tough consultation requirements whilst remaining ever conscious of the risk that the wildfire of rumour and defeatism could destroy whatever business may be left to sell (or at least threaten to derail an organised closure plan). How can IPs ever hope to make everyone happy all of the time? But is the fear of what might happen to the business – and thus to creditors’ returns – if the “R” word gets out, especially when redundancies are only a contingency plan, justification for playing cloak-and-dagger? Or, in this modern world where it seems that transparency outweighs costs and consequences, should employee consultation mean putting all one’s cards on the table even when it seems that there may be little on which to consult?

The sheer scale of this job compounded the problems, but I think that the judgment has some valuable points for IPs handling cases of any size and may present a paradigm shift, putting an end to an outdated attitude of how employees should be treated in insolvency situations.

Cutting to the chase, the Tribunal found that Comet:
• “failed to begin consultation in good time;
• “failed to include the topics of avoiding, reducing, or mitigating the consequences of redundancy;
• “failed to consult with a view to reaching agreement;
• “failed to consult with appropriate representatives (either the Union or elected representatives); and
• “failed to disclose, in large part, the required statutory information” (paragraph 185).

Consultation “in good time”

It is worth remembering that the statutory 90 and 30-day timescales set out by the Trade Union and Labour Relations (Consolidation) Act 1992 (“TULRCA”) are back-stops. S188 states that “Where an employer is proposing to dismiss as redundant 20 or more employees.., the consultation shall begin in good time and in any event…”

Interestingly, although the statutory timescale is what might come to most of our minds when we think about the consultation requirements, the judge said that, as in this case, “when the consultation that followed was with the wrong people, about the wrong issues, with misleading and incomplete information, then the time that consultation began, or should have begun, is not terribly important” and this issue was “by no means the most serious of [Comet’s] failings” (paragraph 203).

Comet was placed into administration on 2 November 2012. Prior to administration, Comet’s shareholder and secured creditor, Hailey Acquisitions Limited (“HAL”), had explored the company’s options and had instructed retail consultants, GA Europe (“GA”), to draw up a plan. The GA “Plan” as described by the Tribunal “involved the complete closure of the business. Although it related directly only to store closures, as the stores were closed, the rest of the business, all the other establishments, could be reduced proportionally; and once all the stores had closed, the rest of the business ceased to have a function and could be closed. Inherent to the adoption of that Plan is a ‘clear, albeit provisional, intention’ to make all the employees redundant” (paragraph 102). The Tribunal concluded that the arrival of GA consultants to the stores on 3 November “is clear evidence that the administrators had adopted the Plan… The plan was ‘to trade the stores for two weeks’. The first stores closed on 19 November. That was to be followed ‘by phased closure of the stores’… By 21 December, all the stores had closed and all employees dismissed as redundant, save for a handful” (paragraph 105).

But weren’t the administrators seeking to sell all, or part, of the business? Could it be said that the administrators “proposed” (per TULRCA) to make redundancies when they were actually trying to avoid that eventuality? Or does the “clear, albeit provisional, intention” phrase from the UK Coal Mining decision in 2008 apply in these circumstances and, by extension, perhaps to all insolvencies where a business sale resulting in the preservation of jobs is the primary intention? “The duty to consult arises when the proposal is still in its provisional stage; not when the decision has been taken. Once the decision has been taken, there is little to consult about” (paragraph 107).

The reality of any possibility of a sale “was hotly disputed” (paragraph 108) in evidence before the Tribunal. Comet’s Head of Finance “gave powerful reasons why the prospect of a sale was vanishingly small” (paragraph 109) and the judge stated that whatever the joint administrator’s “optimism may have been in the early days, sale of all or part was always an unlikely possibility, that quickly dwindled to a negligible one” (paragraph 111). In the judge’s view, “the administrators planned for closure from the outset” (paragraph 114).

As an aside, this is the origin of the criticism that has been Chinese-whispered by the press into the alleged possible ‘criminal offence’ in signing letters/documents to Vince Cable saying that there would be no redundancies. The administrators signed a Form HR1 (which, of course, whilst statutorily-required to be sent to the Secretary of State, never gets near to Dr Cable’s desk) on 5 November stating: “no proposed redundancies at present”. S194 TULRCA makes it a criminal offence to fail to notify the Secretary of State of proposed redundancies. The Tribunal “made no express finding beyond saying that we share Miss Nicolau’s (Comet’s Employment Counsel and General Manager for Employee Relations) surprise” (paragraph 34) at the contents of the Form. The administrators filed a second Form HR1 on 22 November stating that the proposed number of redundancies would be the full staff complement of 6,889, with an unknown date for the last dismissals and the reason for the redundancies as insolvency.

So what is “in good time”? The Tribunal illustrated that the statutory back-stop would be inappropriate in some cases. Some stores closed on 23 December. “To begin consultation 30 days before is to begin it after the key decisions have been taken, and after the store closure was in full swing. By then, the opportunity (if it had ever existed) to raise fresh working capital, to reassure suppliers and the public that Comet had a future, had passed. Closure was inevitable” (paragraph 121). “Consultation has to begin in good time in each establishment; and that means when the GA Plan… was adopted by the administrators and so became a proposal of Comet’s; and that was on 3 November, even if individual establishment closures were postponed for some time” (paragraph 122). Thus, the Tribunal concluded that “in no single instance, at no establishment, did consultation begin in good time in accordance with S188” (paragraph 123).

However, the judgment later seems to suggest that consultation might be achieved far quicker than the statutory timescales: “We accept that in Comet’s financial circumstances, there was never likely to be a 90 day consultation, or in many cases even a 60 day consultation… But in practice, given Comet’s financial situation, a full and frank consultation is unlikely ever to have required that period of time” (paragraph 199). This may be reflected in the Tribunal’s award, which was only 70 days for the employees dismissed early on (whereas those dismissed later were awarded 90 days): “For those [early-dismissed] employees, there was simply no consultation at all; but equally, there was simply no time for any meaningful consultation to be organised… There is some excuse in the early stages of insolvency” (paragraph 205, 207).

The Statutory Content of Consultation

S188(2) of TULRCA states that “the consultation shall include consultation about ways of: (a) avoiding the dismissals; (b) reducing the number of employees to be dismissed; and (c) mitigating the consequences of the dismissals”. But the Tribunal found that these statutory points were never referred to in meetings, agendas, or briefing notes to managers conducting meetings. The Tribunal also was critical of the company’s “limited” view of the consultation process as a means to provide information to employees and to receive their questions. The judge accepted that it may have been realistic for the company to fail to see the process as a way of consulting on how to avoid dismissals, as “by that stage the path to closure was clear and well on the way, even if not ‘a foregone conclusion’. But even if, in Comet’s view, inviting such suggestions would have been futile, the attempt should still have been made; the statute requires it” (paragraph 130).

The Tribunal acknowledged that, in this case, “proper consultation, had it occurred, may well have been nasty, brutish and short. The difficulties in the way of avoiding or reducing redundancies could have been set out: the absence of working capital, the requirement to repay the secured loan covering the existing working capital; the rationale for adopting the GA Plan could have been explained; that there was no money to keep paying wages or rent other than by liquidating the stock as quickly as possible; no money to pay for more stock; and that much of the stock was itself subject to retention of title” (paragraph 199).

The Tribunal recognised some of the issues facing the company/administrators in organising meaningful consultation. The process was “tightly controlled to ensure a consistent and uniform approach” (paragraph 66); managers in effect had been working to scripts, collecting – but prohibited from attempting to answer – questions, any answers being given via a centrally-issued document, for managers’ eyes only, at the next arranged meeting. “Such a process of question and answer, conducted over a number of meetings is inevitably cumbersome and slow, but could in principle amount to consultation… but in the short timescale allowed by the circumstances of administration, with a clear proposal to close the entire business before Christmas, it meant that meaningful consultation was most unlikely to be achieved through that model” (paragraph 126).

The Tribunal was critical of the “bland generality” of some of the answers provided. For example, “Why are we closing and why have certain stores been chosen?” was answered: “There are certain financial commitments at specific locations that we are unable to meet. We therefore have to close down that entity before these amounts fall due”. The judge felt that “a frank answer would have been: ‘There is no money to pay the rent for the next quarter. Therefore, your store is earmarked for closure two days before the next instalment of rent is due’… Without that information, it was not practicable for representatives to bring forward their own proposals” (paragraph 132).

But how practicable could any employee proposals hope to have been? The judge suggested that they could have tried to prolong the life of their store, say, at the expense of another in the locality. In one specific case, the judge suggested that it would have been useful for employees at the Service Centre to have learned that the services were to be placed with an alternative provider: staff could have been invited to work for the new provider “or indeed there might be a service provision change under TUPE” (paragraph 136).

Consultation “with a view to reaching agreement”

The Tribunal found on balance that there had never been any “intention to attempt to reach agreement through the consultation process” because of “the failure to provide key information: the existence of the GA Plan, for example; or to be frank about the number and timing of redundancies; to provide even basic information, such as store closure dates; … the failure ever to raise the key statutory issues [i.e. ways of avoiding dismissals etc.]…; the cumbersome structure adopted; and the willingness to ignore and by-pass the consultation process when it suited the administrators” (paragraph 145).

But what kind of agreement could ever be hoped to be reached in these circumstances? “We emphasise that we place no weight on the absence of actual agreement on the statutory items. Given the dire nature of the financial situation, the most that could ever have been hoped for by way of reaching agreement was a reluctant acceptance of the inevitable… But that is to look at the large national, overall picture. Within that picture, there was scope for meaningful consultation with the potential of reaching agreement at a local level on, for example, selection criteria where redundancies were phased over a period; alternative employment where establishments had the potential to transfer over or stand alone” (paragraphs 147, 148).

Employee representatives

Comet’s case was that it had consulted with representatives falling under S188(1B)(b)(ii) of TULRCA: “employee representatives elected by the affected employees, for the purposes of this section, in an election satisfying the requirements of S188A(1)”. However, the key issue was that there never had been any formal election process: some employees had put themselves forward for the job, others had been put forward by their colleagues (often, it seemed, when they were away on holiday!), and others had been asked by their managers to stand.

The judge concluded that the absence of a fair election – which could not be substituted by a fair selection – was fatal to Comet’s case in this regard. Although there had been no suggestion of abuse of the process, the judge noted that selection by managers could be abused: the manager could avoid selecting disgruntled employees, or such employees could conclude there was no point putting themselves forward if the manager made the ultimate decision.

The problem for Comet was that, since there was “no consultation with employee representatives elected for the purpose, there was no consultation at all within S188” (paragraph 177). Oops!

The Tribunal also commented that, given that Comet’s aim had long been a business sale or transfer and, failing that, redundancies, so that in either event consultation under TULRCA or TUPE would be necessary, Comet could have taken steps to put the machinery in place to elect representatives long before the administration began.

Disclosure of Statutory Information

S188(4) sets out a hefty list of information required to be disclosed in writing by the employer to the employee representatives. The judge found that Comet failed to address some of substance.

He felt that it had been “misleading to omit” (paragraph 151) the immediate reason for the administration – HAL’s demand for repayment of the loan – from “the reasons for his proposals” as regards redundancies. The judge noted that, given that he had found that the GA Plan had been adopted on 3 November, “that information could have been given to representatives from 3 November, as a firm, albeit provisional, proposal. The information provided at the first consultation meeting was completely misleading on this crucial point” (paragraph 152).

The judge observed that, although the GA Plan seen through would result in all employees being made redundant, the method of selecting employees for dismissal “was very significant in the short term” (paragraph 154) in these circumstances where the redundancies were staged. However, no information on the criteria or method of selection was shared, despite it being promised in a letter to representatives that itself was considered deficient by the judge, who suggested that the promise should have been “to share, discuss, and we hope, agree the criteria” (paragraph 155).

It seemed that employees, their representatives, and most of the managers tasked with the job of leading the consultation meetings, had been left in the dark as regards planned store closures and redundancies, where “it was generally possible to give employees notice of a day or two of the actual closure date” (paragraph 157), with dismissals generally occurring a day or two after closure. “Time and again we heard of redundancies being carried through immediately before and after consultation meetings at which those redundancies were never mentioned” (paragraph 142). “The failure of Comet to provide accurate information to representatives about this factor, the proposed method of carrying out dismissals, contributed more than any other to the widespread dissatisfaction and cynicism with which the consultation process came to be regarded” (paragraph 158).

“Special circumstances”?

Alright, so the Tribunal considered the consultation process a failure, but doesn’t TULRCA acknowledge “special circumstances which render it not reasonably practicable for the employer to comply with” (S188(7)) certain requirements? Does this apply in this case?

The judge referred to precedent that indicates that there is nothing special about insolvency. “What has to be established is that the insolvency is itself unexpected” (paragraph 180). In this case, because of HAL’s “sudden, unexpected and disastrous” withdrawal of working capital and demand for repayment, the judge found that the company’s administration did amount to special circumstances.

However, S188(7) continues to provide that the “special circumstances” factor falls away “where the decision leading to the proposed dismissals is that of a person controlling the employer (directly or indirectly)”. As “HAL controlled Comet” (paragraph 183) – although it is not clear whether the judge felt that this control was by reason of HAL being the shareholder or because it was the secured creditor and provider of working capital to Comet – the judge concluded that Comet could not rely on the “special circumstances” defence.

“Going through the motions”

Perhaps the administrators’ mindset towards the consultation process may be revealed by the contents of their letter to employees dated 12 November: “the company is proposing to commence a collective consultation programme with Comet staff. This is intended to offer a means to provide information about the company’s plans for the future, and for the representatives to raise questions, and air their views on any proposals” (paragraph 51). However, the judge summarised the aims of the statutory provisions as: “to require the employer to consult with elected representatives, once redundancies have been proposed, in good time and with a view to avoiding redundancies, reducing their number and mitigating their effects. To do that with authority, the representatives should be elected; and they should be provided with the necessary statutory information, including the reasons for the proposals and the scope of the proposals (numbers and descriptions of employees involved, the method of selection and the timescale). Since the consultation must be with a view to reaching agreement, it requires a serious engagement with the issues raised, conscientious consideration of questions and issues raised, an element of dialogue and mutual exchange” (paragraph 192).

Despite conducting over 600 meetings and identifying 572 employee representatives, the judge felt that “it is the quality and [the consultation’s] compliance with the statutory provisions that counts” (paragraph 191). He stated that this was “in essence a case of an employer going through the motions. This was the appearance of consultation, but not the reality. It is not just and equitable to give credit to an employer for going through the motions, without any intention of engaging meaningfully in consultation, however extensive the effort put into the consultation process” (paragraph 197).

Lessons to be learnt

This case reveals some relatively straightforward, but essential, checks that can be made as regards standard documents etc., for example:

• Ensure that all documentation around the consultation process covers the statutory points that must be addressed in consultation meetings and that case-specific disclosures of the statutory information are meaningful.
• Ensure that reference is made to consultation and agreement, not merely information provision.
• Ensure that the election process of employee representatives (where required, not forgetting recognised trade unions and other existing employee representatives) complies with statute and don’t be tempted to cut corners with a view to getting on with the consultation itself. Refer to the election process in pre-insolvency advice letters: after all, consultation is required under TUPE as well as TULRCA.
• Take care when completing Forms HR1 and remember to submit further forms in good time and where necessary.

However, perhaps more difficult but more vital lessons that arise from this judgment involve the seeming mindset change that appears to be required:

• Be as open as possible and as is sensible about the company’s situation and the business’ prospects, even if they are bleak. Avoid relying on vague statements about insolvent companies in general.
• Don’t get too hung up on the statutory consultation timescales, but rather concentrate on being honest about the situation when the prospect of redundancies is first contemplated. Keep in mind the aim of meaningful consultation with a view to agreement, however small the window of opportunity and inevitable the outcome, rather than ticking boxes as regards meetings held.
• Don’t treat all employees as one unit. If different circumstances and plans exist for different “pools”, tailor discussions accordingly and consider the smaller pictures. Even if the big picture is an inevitable close-down, there may be scope for meaningful consultation on parts of the plan.
• If you use separate staff, departments, or external consultants to deal with employee matters in insolvency cases, make sure that they are kept up to date and are given the assistance and authority needed to update and consult with employee representatives.
• Continue to update employee representatives as events move on.
• Make a serious effort to consult.

Am I forgetting how all this may impact on an administrator’s ability to meet his primary goal of achieving a Para 3 objective? Personally, I remain conscious of those tensions, but I do wonder if being entirely honest and upfront with employees can be constructive, rather than destructive. I’m sure that those more cynical than me, who continue to see the insolvency and the consultation requirements as mutually exclusive, will have opportunities to air their concerns, when the government’s eye turns again to IPs as it contemplates the RPS’ bill for the Comet protective awards.

The sole shareholder and managing director of a company drew a salary sporadically in the years preceding the company’s insolvency and was paid no salary in the last two years of the company’s trading, her evidence being that, because times had been hard, she had forfeited her salary to enable the other employees and creditors to be paid.

The Appeal Tribunal found that the Employment Judge had been entitled to conclude that Mrs Knight’s agreement that she would be unpaid did not amount to a variation or discharge of her employment contract. The judge accepted that “the absence of payment under what is said to be a contract of employment is a factor which the tribunal of fact has to consider and take into account” (paragraph 23), but it does not necessarily mean that there is no consideration from the company. Consequently, Mrs Knight was entitled to a redundancy payment from the RPO.

Abuse of process to seek a winding-up order on appealed tax assessments

HMRC presented a winding-up petition on the basis of non-payment of a number of tax assessments, which were the subject of appeals. It was the judge’s view that, since April 2009 when VAT appeals moved to the First-Tier Tribunal, “the winding-up court should in my view now, post-2009, refuse itself to adjudicate on the prospective merits of the appeal and leave that question to be dealt with by the tribunal, either dismissing the petition or staying it in the meantime” (paragraph 11). The Tribunal had already ruled that the appeals were not ‘hopeless’ and thus “any attempt to revisit the tax judge’s ruling should be done by an application to the tribunal itself rather than by invitation to a winding-up court to second-guess that decision” (paragraph 12). The judge continued: “These matters are in themselves sufficient to lead me to the conclusion that the petition should be dismissed as an abuse of process and/or as a matter of discretion and the advertisement restrained” (paragraph 14).

(UPDATE 13/02/2015: on 28 January 2015, the Court of Appeal allowed HMRC’s appeal: Lord Justice Vos did not agree that the tax tribunal’s jurisdiction to decide on the validity of assessments abrogated the Companies court’s jurisdiction to decide on whether a company should be wound up. In the circumstances of this particular case, Vos LJ felt that the judge should have concluded that the tax assessments were not disputed by the company in good faith and on substantial grounds and consequently he allowed the appeal and made an order for the company’s compulsory winding-up. http://www.bailii.org/ew/cases/EWCA/Civ/2015/29.html)

An elaborate façade of transactions was insufficient to thwart a tracing claim

Mr Varsani appealed an order, which had arisen from the liquidator’s claim of unjust enrichment. His appeal was dismissed.

The facts of the case had been unusual in that the funds had not be paid from the company’s account into Mr Varsani’s account either directly or via a chronological chain of transactions flowing through a number of accounts, but, in the words of Lord Justice Floyd, the transactions were “an elaborate façade to conceal what was in truth intended and arranged to be a payment for the benefit of Bhimji Varsani” (paragraph 121).

Lady Justice Arden felt that the judge had had plenty of material from which to draw the inference that the company’s money was substituted by payments used ultimately to make the payment to Mr Varsani. She said: “The decision in Agip demonstrates that in order to trace money into substitutes it is not necessary that the payments should occur in any particular order, let alone chronological order. As Mr Shaw submits, a person may agree to provide a substitute for a sum of money even before he receives that sum of money. In those circumstances the receipt would postdate the provision of the substitute. What the court has to do is establish whether the likelihood is that monies could have been paid at any relevant point in the chain in exchange for such a promise” (paragraph 63).

A tenant was made bankrupt and then the sub-chargee of the tenant’s house appointed receivers, after which the trustee in bankruptcy disclaimed the lease. The receivers then lined up a sale of the house and, the day before completing the sale, they served the landlords with a notice claiming the freehold of the house under the Leasehold Reform Act 1967.

The Act gives a tenant the right to acquire on fair terms the freehold where certain conditions are satisfied. Crucially, the server of the notice must have been a tenant of the house under a long tenancy for the last two years. The landlord challenged the validity of the notice on the basis that the appointment of the trustee in bankruptcy had resulted in the vesting of the tenancy in the trustee, who had not been in office for two years (and in any event the receivers did not purport to serve the notice on behalf of the trustee).

Lord Justice Rimer described the landlords’ submission as “not just simple, it is formidable” (paragraph 27). He considered that the ‘last two years’ condition was not met and thus the receivers’ claim to the freehold “was writ in water and signified nothing” (paragraph 34). The appeal judges unanimously allowed the landlords’ appeal.

http://www.bailii.org/ew/cases/EWHC/Ch/2014/1100.html
The long-running claims of the members of the LLP that the Administrators, RBS, and property agents, had conspired to defraud came to a head in this application brought by the former Administrators in which they sought the striking-out of the members’ proceedings.

The judge’s summary of the members’ claims leaves the reader in little doubt as to what the punchline might be: “The Members’ criticisms are not about professional negligence by the Administrators or by the valuers whom they instructed or by the agents whom they instructed to sell the Hotel, nor are there criticisms about the mode of sale, nor the handling and outcome of the negotiations for the sale. Instead the Members have pleaded a very different kind of challenge to the sale… [They] say that the marketing process was a sham. They do not identify the respects in which it was a sham, but they say it was a sham. They say it was a pretence and they say that it was pursuant to a conspiracy to defraud… All the conspirators knew, so it is alleged, that the Hotel was worth £7 million. It is quite clear that the Bank’s duty and the Administrators’ duty would have been to get the open market value for the Hotel and to achieve the market value. However, so it is alleged, the Bank was not prepared to see the Hotel sold for its full value and the debt owed to the Bank paid. What the Bank wanted instead was that the Hotel should be sold at around 50 per cent of its true value and not sold in the open market to a fortunate purchaser, but sold to an associated company of the Bank, West Register Limited. In order to carry this fraud to fruition, it was necessary to have Knight Frank place a value on the Hotel, which was about 50 per cent of what Knight Frank fully appreciated was the true value, about 50 per cent of £7 million. Armed with that fraudulent valuation from Knight Frank, the conspirators would then pretend to market the hotel, there would be a sham marketing process and the Hotel would be sold to the predetermined purchaser, West Register. I suppose one can see what was in it for West Register. They would acquire something at half its true value. It is less obvious what was in it for the Bank, because their debt, which exceeded the sale price that came about, would not be paid in full, but, perhaps, the Bank would be content that its associate had profited in that way. It is difficult to see what Knight Frank’s motive for this very serious act of dishonesty and wrongdoing would have been. It is submitted to me that they had motive enough: they wanted to please the Bank. It is also difficult to see what the Administrators’ motive would have been for participation in this fraud. This fraud is of the gravest and most serious character. However, it is submitted to me that I should see the force of the point, that the Administrators simply wanted to please the Bank” (paragraph 28).

Nevertheless Morgan J acknowledged that “it is a strong thing for a judge to strike out a case or give summary judgment, particularly in a case where there is an allegation of serious wrongdoing” (paragraph 33) and he also noted “a most disturbing report” (paragraph 25) written by Lawrence Tomlinson, by which he was “sufficiently disturbed… to give the Members a chance to take legal advice as to whether they had a properly pleadable case at an undervalue” (paragraph 50).

In relation to the allegation that the marketing was a sham, the judge stated that it was “utterly fanciful. It is an allegation put forward by someone (the Members) who simply refuse to face up to the reality of what has happened here” (paragraph 43). In dealing with the allegations that the prospective Administrators’ communications with the Bank were improper, the judge noted that the letter of instruction was “really very clear indeed” as regards the relationships between the parties and there was a “complete lack of material to indicate that [the IPs] were guilty of this very serious fraud”. In view of this, Morgan J also had strong words for counsel for the members: “his professional duty was to decline to plead the allegation which he did plead, alternatively, to withdraw from the case” (paragraph 49).

Consequently, the judge dismissed the conspiracy to defraud or, alternatively, the undervalue claim, along with the members’ Para 75 claim, which was quickly dismissed on the basis that the members did not have a pecuniary interest in the relief sought.

(UPDATE: the judgment on the appeals was given on 13/10/2015 ([2015] EWCA Civ 1001). The involvement of West Registrar made Lady Justice Arden “scrutinise what happened with scepticism, but at the end of the day it is impossible for the appellants to get round the evidence as to the way the respondents marketed the hotel”. The appeals were dismissed.)

The Holgates are creditors and members of a company over which Joint Administrators were appointed by the QFCH. The Administrators included a Para 52(1)(b) statement in their Proposals. Mr Holgate requisitioned a creditors’ meeting, but then withdrew his request, having received the Administrators’ request for an indemnity to cover the costs of convening a meeting, estimated at £21,900. Shortly thereafter, the Administrators issued notice that the Proposals were deemed to have been approved.

Some time later, the Holgates applied to court under Para 74 to order the Administrators not to sell the company’s business and assets as they planned; to revoke the deemed approval of the Proposals and the basis of the Administrators’ fees as fixed under R2.106(5A); and to require a Para 51 creditors’ meeting to be held. The Holgates submitted that the company could, and should, be rescued as a going concern by means of a CVA and thus the Administrators should not have made a Para 52(1)(b) statement. They also submitted that there had been a fundamental change of circumstances since the Administrators’ Proposals, because since then the FSA had announced that the major banks had agreed to provide redress on mis-sold interest rate hedging products and that such redress may well negate the bank’s claim against the company. The Administrators countered that the business had been trading at a loss both before and after Administration and that, whilst they had instructed solicitors to investigate the mis-selling claim, they were not in funds to pursue it. They were also keen to conclude the business sale for fear that it would otherwise fall away.

The Holgates failed to persuade Hodge HHJ that the Administrators’ evidence that the company could not be traded profitably was wrong. Thus the judge concluded that, on the evidence, it could not be said that the Administrators did not genuinely hold the opinion that the company had insufficient property to enable a distribution to be made to unsecured creditors other than out of the prescribed part and therefore they acted properly in dispensing with a creditors’ meeting by reason of the Para 52(1)(b) statement in their Proposals.

The judge found that the costs within the estimate of £21,900 in relation to a requisitioned meeting “may well have proved exaggerated; but I am not satisfied that they were deliberately exaggerated by the administrators with a view to deterring Mr Holgate from pursuing his requisition of a meeting. In my judgment, the administrators were acting cautiously in looking at a worst case scenario for the costs” (paragraph 38) and, in any event, the creditors’ meeting could have resolved that these costs be paid from the estate.

Hodge HHJ also considered the Holgates’ application in relation to Para 74(6)(c), i.e. that no order may be made if it would impede or prevent the implementation of proposals approved more than 28 days earlier. The judge felt that this applied as much to deemed approved proposals and that, as the Holgates were asking the court to resist the business sale, which was “the whole tenor of the proposals” (paragraph 44), he should dismiss the application. As an alternative, he was also not inclined to exercise the court’s discretion, as he felt that Mr Holgate had acted unreasonably in not pursuing the requisition for an initial creditors’ meeting and he pointed out that Mr Holgate had the right even then, under Para 56, to requisition a meeting given the apparent level of his claim as creditor.

As regards the suggestion that the FSA announcement supported a change in circumstances that might persuade the court to make a direction under Para 68, Hodge HHJ did not agree: “the existence of the FSA review merely relates to the means by which the mis-selling claim may be pursued. It is not clear whether it applies in the present case, or will secure sufficient satisfaction for the company even if it does. In any event, because I am not satisfied that the rescue of the company as a going concern is a viable proposition, it does not seem to me that there is any proper basis for the court to give any directions under paragraph 68 with regard to the holding by the administrators of a meeting of creditors” (paragraph 51).

Despite a consenting winding-up petitioner, the court declines to make an administration order and instead appoints a provisional liquidator

Shaw v Webb & Ors (10 April 2014) ([2014] EWHC 1132 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/1132.html
HHJ Simon Barker QC acknowledged that, “on paper the criteria or preconditions for making an administration order, which are set out at paragraph 11 of Schedule B1, are made out: (a) there is no question but that [the company] is unable to pay its debts, and (b) the evidence of Mr Webb points to it being reasonably likely that the purpose of administration (in this case a better result for the creditors than would be likely on liquidation) will be achieved if an administration order is made” (paragraph 18). In addition, neither the petitioning creditor nor the QFCH opposed the making of an administration order. Therefore, why did the judge decline to make the administration order, but instead appointed Mr Webb as provisional liquidator, allowing the winding-up petition to proceed?

The judge felt that the payment of £115,000 that occurred post-petition “cries out for satisfactory explanation and justification” (paragraph 23); he felt similarly concerning the purchase of the company’s sole share post-petition; and he wondered whether there were other dispositions that may be unjustifiable, expressing surprise that the bank statements for the post-petition period were not in evidence (another item to add to the administration order application shopping list?)

Consequently, in view of the fact that the making of an administration order would neutralise the effect of S127 in relation to post-winding up petition dispositions, Simon Barker HHJ felt that it was appropriate to call the winding-up petition on for hearing. A winding-up order has since been granted.

Can an Income Payments Order be made after a short Income Payments Agreement is completed?

A bankrupt had entered into an Income Payments Agreement (“IPA”) with the Official Receiver, which effectively gave the OR the benefit of the bankrupt’s NT tax code up to the end of the tax year in which the debtor had been made bankrupt.

Later, Joint Trustees were appointed and, after failing to agree a further IPA with the debtor, they applied for an IPO in the amount of £10,000 per month for three years from the date of the IPO. The District Judge concluded that the Trustees were not entitled to an IPO on the basis that there had already been an IPA. The Trustees appealed.

Mrs Justice Aplin considered at length the effect of the introduction of S310A by means of the Enterprise Act 2002: were the intentions to limit the period of income payments to a maximum of three years and to provide that either an IPA is agreed or an IPO is sought?

The judge’s conclusion was that the court remains entitled to grant an IPO notwithstanding the previous IPA. She said: “It seems to me that the plain and ordinary meaning of section 310 is clear and that there is no reason to go beyond it. Furthermore, had the legislature intended that jurisdiction be limited in the way which is suggested, it seems to me that it would have said so at the time of the express amendments made by sections 259 and 260 of the Enterprise Act 2002” (paragraph 25).

As regards the issue of whether the combined maximum of income payments is three years, the judge said: “It seems to me that even if the Respondent is correct and it was Parliament’s intention that a bankrupt should not be required to pay part of his income to his trustee in bankruptcy for more than 3 years, the potential for an anomaly if there is jurisdiction to make an Income Payments Order despite an Income Payments Agreement having already been entered into is met by the existence of the discretion of the judge when exercising the jurisdiction whether to make the subsequent order and if so, the length of the order in question” (paragraph 28)… so I guess it remains to be seen whether the Trustees will be granted a full 3-year IPO on top of the 5-month IPA.

The Supreme Court upholds a Receiver’s right to be paid notwithstanding a quashed restraint order

Barnes v The Eastenders Group & Anor (8 May 2014) ([2014] UKSC 26)

http://www.bailii.org/uk/cases/UKSC/2014/26.html
I summarised the lead up to this Supreme Court appeal in an earlier post (http://wp.me/p2FU2Z-1H). Briefly, a Receiver was appointed over third party assets along with the CPS’ application for a POCA restraint order, which subsequently was set aside. The outcome of earlier court decisions was that the Receiver was not permitted to draw his fees and costs from the third party assets on the basis that the party’s right to peaceful enjoyment of its possessions under Article 1 of Protocol 1 of the European Convention of Human Rights (“A1P1”) took precedence, but also there was no basis under the POCA or the Human Rights Act 1998 for the CPS to be required to pay the Receiver’s fees and costs. The Receiver appealed to the Supreme Court.

In a unanimous judgment, the Supreme Court supported the previous decision that, as in this case there was no reasonable cause to regard the third party’s assets as the defendant’s at the time of the order, it would be a disproportionate interference with the third party’s A1P1 rights for the Receiver’s fees to be drawn from that party’s assets.

However, the judges felt that to leave the Receiver without a remedy would be to substitute one injustice for another and violate the Receiver’s A1P1 rights: “a receiver who accepts appointment by a court is entitled to know that the terms of his appointment will not be changed retrospectively. Moreover it is an ordinary part of receivership law that a receiver has a lien for his proper remuneration and expenses over the receivership property. To take away that right without compensating him would violate the receiver’s rights under A1P1” (paragraph 96). However, Lord Toulson agreed that there was no power in the POCA to order the CPS to pay the Receiver’s fees and costs.

The judge considered that the solution lay in the concept of unjust enrichment. The IP had agreed to act as Receiver on the basis that his agreement with the CPS provided for him to be paid from the defendant’s assets over which he would be entitled to a lien. The enrichment arose from the CPS’ perception that there would be a benefit to the public in the party’s assets being removed from its control and placed in the hands of the Receiver whilst its investigations were proceeding, but it was unjust enrichment as there was a total failure of consideration in relation to the Receiver’s rights over the assets, which was fundamental to the basis on which he was to act. Thus, the Receiver was entitled to look to the CPS for payment of his fees and costs.

Lord Toulson had some “lessons for the future” for the CPS. He noted that in the Court of Appeal judgment, the judge had “deplored the fact that the original application was made at short notice to a judge who was in the middle of conducting a heavy trial with only a limited time available for considering it” (paragraph 118) and stressed that, in view of the fact that such serious applications are made ex parte, the CPS had a special burden of candour and, because of the potential to cause serious harm, a material failure to observe the duty of candour could be regarded as serious misconduct.